Sep 25 – Presentation, BSH and Trade plans

Tomorrow I am going to be presenting at the mastermind group about how to deal with your trades during a correction event. It entails having a trade plan that deals with potential broker rules, neutralizing income trades to allow for removal of hedges and doing practice runs w/ your similar structures through the Aug and Feb events of which we have data for. It talks about adding in how the system will react to your portfolio of trades and knowing how to deal with that. It’s so important to have this area attached to your trade plan. We need to address systemic issues (how the system (broker, margin rules etc) will react to your portfolio of trades.

The Feb vol event was a big hit on the system and represented the single largest increase in VIX (VVIX) in all of history. Volatility and VIX by the nature of how it is calculated represents the premium or insurance rise in the value of options at specific strikes. Each option contract is basically an insurance contract for that specific point in the market. Simplistically put (no pun intended), someone buys a 2825 put because they want to be protected for any falls below 2825 while someone else might buy a 2500 put because they don’t want the risk below 2500. The pricing of the option contract at 2825 is quite a lot higher than the 2500 put because you’re asking for a lot more protection. . The pricing of each contract has stable portions but the unstable portion, the portion that changes when all else remains the same is what represents the premium or insurance cost or fear price that we are selling or buying. This premium value can change across different strikes at different ratios and that is what we define as skew. That thing that changes across strikes, visualize each strike price as a like a bar graph with part of it shaded black. That black part can move up or down depending on the market pressures of each strike, some events put pressure on way out of the money puts while others might not. These changing “black portions” of the bar graph is how you can visualize skew. You might see a 2825 contract really get jacked up in premium but no change in the 2500 premium. If you’re a net buyer of 2500 but sold the 2825, you just got screwed by skew. Anyways, back to the point, the VIX It’s supposed to represent the fear in the market related by noting the increase in the insurance premium. We’re net sellers of that insurance, and when you are a net seller of insurance that just had the largest rise, you’re going to have problems. We’re glorified market insurance sales people 🙂 These problems can be not just in P/L, but also in how the broker reacts to the increased value of those contracts despite the risks of said contracts as well as the general margin rules related to portfolio margin while we are removing hedges (which must be taken off right around the event).

Our trades were theoretically supposed to be immune to such events as we had separate hedges but we had a failure in how the system reacted to the value of our trades which was not expected nor where the rules they implemented at certain brokers known. We need to address potential systemic reactions in our black swan trading plan.

The Feb event was a problem not because of the trades per say but rather how the system/brokers responded to the increased value of those trades after the event. It was how the system responded to the trades that threw most of us for a loop. We’re dealing with incredibly complex trade systems that were meant to solve for all the known variables. They did for the crash day but the system they were in didn’t allow for the unwind that we needed. The hedges we have only last a few days as they are fear based hedges. If we can’t unwind those, we’re fucked. That was unforeseen but now solved for.

Poker

I’ve been studying quite intensively for the upcoming WPT in October (Montreal) and the end goal big daddy PSPC in Bahamas in January. The PSPC is a 25k buy-in mega event where Poker stars gave away 300 25k seats for free plus added 1MM to first–Total of 9MM juiced into the tournament by poker stars for free. I’d usually max out at 10k just because I think its kinds nuts to go higher for a tournament but a few friends wanted to get in on the action and are going to stake a bit. So I’ll sell off 10k in action. It’ll be an epic tournament.

A lot of people ask me how can I possibly study for poker. It’s not what you’d think. It’s incredibly complex and requires a lot of upfront hours to be at par.

Here’s a example of the thought process of a hand to give an example that I’ve told my friends who’ve asked:

Let’s say you’re dealt QJs in the small blind. Everyone is 100BB deep.

Everyone folds to Button who raises. His range of hands is very wide being on the button. Probably 45-50% of all possible hands. Being in small blind we’re generally 3-betting or folding as we really don’t want to act first every hand nor do we want the BB to mandatory complete which puts us against 3 opponents on the flop. SO the three bet can show immediate profit but if he calls, we’re still good.

So we 3-bet.

The Button smooth calls. His range becomes quite defined here as he can’t call a three-bet with most of his range.

What do we know so far? Well it’s unlikely he has AA or KK and with QJ we block combos of QQ and JJ. So we block a lot of his value range and its unlikely though not impossible he has AA and KK

Flop comes T73 rainbow

His value range is pretty much only sets and two pairs as we’re blocking QQ and JJ and AA and KK is unlikely.

We have decent equity here with two overs, we can turn a K or 9 for open-ended and an 8 for a gut-shot and thus we can barrel every turn with semi-bluffs because of villains range. Further, a bet here is showing immediate profit as many Ace high, king high (beating us currently) are folding though some are calling. On the turn, if he called flop bet, he still has some Ace highs and small pairs, mid pairs that will fold to a second barrel. Further we aren’t blocking ace high as we have QJ so that’s a further edge. Let’s move on to the next card.

We bet and he calls

Turn is a 2

Given his call on the flop, it’s likely he has ace high type hands or over card broadways. These will have a hard time calling a second barel. We do NOT block his ace high hands so that’s a positive. We don’t want to block his folding hands that re better than ours. This is a good second barrel bluff. He’s forced to fold a lot of better hands here.

Concepts like blockers, knowing the opponents range and our own gives us ability to gain small edges and to make the right plays which are necessary in this game. I’ve got probably at least 50 hours of study before MTL and double that before Bahamas. But once I get past that, I should have increased to a level where I can really make a run in this world. It’s the only thing at my age that I can compete at on a world stage so I’ll stick with it.

3 thoughts on “Sep 25 – Presentation, BSH and Trade plans”

  1. Wow! And I thought trading options was complicated!!! 😉

    Just wanted to say I’m really looking forward to the MM presentation. the BDH factory is still an area that I don’t have really “systematized”, so something I continue to work at. I’ll be listening.

    Bill

  2. This is a fantastic article that people trading complex structures based off of backtesting alone should really read and grasp. I too had some pretty big trades on in Feb that behaved nothing like backtesting showed they would (even modeling based on flash crash/Aug 15/etc.). In the end I was able to get out for a loss that wasn’t devastating but it did completely change my thinking on how I set up trades. I moved to smaller scale in trades with a risk graph at expiration I could live with regardless of what portfolio margin told me I could do. At the end of the day, when it hits the fan options are priced based on what people are willing to buy and sell for and that can be very different than what the models tell you. Thanks again for this post.

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