Oct 15 2018 – Update on Trades

All in all, this was a perfect little mini-crash tester for my systems and risk parameters. My systems and parameters (trade plan) were drastically revised after the Feb event (which was an absolute earthquake shake up in how I handle risk). That event let me see how everything reacts both re BS protection and how the system reacts to the portfolio of trades. The really important part is the nuance of removing trades while staying within margin parameters. The hedges have to get taken off quickly but that means you have to take off some income trades. These income trades are sometimes riddled with so much juice that it is hard psychologically to remove them. The thing is, you’re now closer to your tent, any stabilization and you could be at 2-3x your profit target in the first place. So re human factors, what do you do if your hedge didn’t fully protect your income (under sized or it just didn’t trigger, or you waited too long to remove) and you’re down 5-10%. Do you just take the loss and close the hedge and income trade with no hope of getting back? Do you close it all down and open new ones? All these things have to be part of a trading plan. Accounting for how to deal with yourself and your portfolio during an event is crucial.

I am convinced the experience I gained having traded through the markets of Sep/Oct 2014, Aug 2015, Jan 2016, Feb 2018 and now Oct 2018, gave me an incredible wealth of insight into how to manage events and event risk. I feel that I am reaching a stage of trading where my focus is solely on risk management much before maximizing returns. That’s a big big step for me, I am naturally a risk taker, and I go big. To be so focused on the opposite part and it now being natural is a massive step for me. It’s served me very well in life re taking risks and making them work but with the nuance that I usually have 3 back ups and really understand the risks/odds I don’t sleep until I make sure it works! In trading, I found that I sometimes didn’t initially understand fully the risks and I couldn’t just make it work. So this slaps you in the face and requires you learn to be pro-active in risk management. And here we are. This was and is the hardest thing I’ve done in life. I think that road (the learning of how to manage risk) is now coming to an end, I think I’m arriving to the point where I should be re trading. Risk in trading is not easy especially if you’re doing amounts that make a difference to your life. Taking large losses during an event and/or waiting for the vol to come out can take months and these months can affect your life if you’re trading large. I can tell you that it sucks waking up at 3am to check futures. It’s just not worth it. Pre-plan and take care of your risks. As I said, I am a risk taker, always have been and I’ve done it successfully in all areas of my life. I mean I was a professional gambler at the start (7 years!), made tons, parlayed that into a business (all of my cash..which is absolutely insane if you think about it) I could have retired off what I made but instead, I bet it all on a business. Took that risk. But. When I choose to take a big risk, I do everything I possibly can to make it succeed. That’s the key (but it doesn’t work with trading unless you’re thinking long term development as a trader). What I mean, is if you have an event, and you’ve taken loss, you just can’t do anything there can you? But you can do all you can to work on your trading plan and yourself to make sure it doesn’t happen again. I don’t sleep at night if it requires attention. You just make it work. I’ve seen so many people start businesses, then just fuck off and give up on it. It’s like they end up with a resentment to it, a resentment to their failed expectations. That resentment seems to push them away from success and allows them to accept the failure. They’ve tricked themselves into hating their business or whatever it is which allows them to just close it up.

This Feb event gave the tools and foresight to strengthen my trade plan in this search for what I hope ends up being an almost riskless very conservative way to obtain 30-40% returns per year. The Oct mini-event, allowed a partial test of the new systems and allowed me to refine a few things. The goal used to be to trade very intricate complex structures and trade it full time and aim for 75-100% returns on capital but as my size grows and as my risk appetite lessons, and as my focus to risk management changes, I’ve realized that I probably will max out in the 30-40% range for OTM structures. I do believe the best ATM traders (John Locke, Kevin Lee) can do the 70-100% returns but it all depends on what capital they’re using. If you’re allocating 100k out of 2MM to a trade, then sure, you can probably accept specific risk parameters that allow you to obtain those out-sized returns, but if you’re allocating the entire 2MM then you have to dial it down.

What’s changed this time around?

1. I am going to allocate 50% of what I normally allocate re trading capital. I am so PISSED that I didn’t have more dry powder on Thursday. The shit is like 4x more juicy to enter. I am convinced if you waited for a 90% MDD day to enter these types of trades, you’d make the same amount as if you entered every month. These 90% MDD days happen 3.5x a year on average for the last 50 years.

2. I am going to have a trifecta of hedges (that’s right, 3). I will use an LP campaign, a Hedge BSH, an income BSH and KH for margin control.

3. I will be utilizing some bearish ATM structures as a partial hedge and separate income trade that covers that first 5%-7% down move in the markets.

4. I will utilize bearish STT during bounces after a crash event as well as index dynamic hedging.

5. Maybe stay away from futures and futures brokers 🙂

6. I don’t think I’ll trade HS3 unless its opportunistic and on large MDD type days. I don’t love its unpredictable complexity. I feel an STT so intimately.

5 thoughts on “Oct 15 2018 – Update on Trades”

  1. Thanks for the update Patrick. I am coming to many of the same conclusions, but you are way ahead of me with how structured your plan is. I find it hard to backtest the combination of all of these structures, and to really optimize the best combo. I had about 150 STT-BWBs on and a good set of BSH’s on, and this event worked out pretty well for me, but I feel like I got a little lucky, rather than having a solid plan that I had confidence in. I’m not trading as big as you, but it’s big enough (7-figures), and risk management is king with that size. You’ve inspired me to keep working on a much more structured plan.

  2. No problem. Glad to hear it. With that big sizing, it’s defintely a good idea to get structured and keep focus on risk management. Nice job on coming out relatively unscathed during this event. I am the same. I had about 282 on total and did OK. They are approaching about $150 a unit down now. Not bad. They are so loaded w/ theta as are my January. By end of month, should hit yearly highs in balance. Did you get off your BSHs?

  3. I didn’t remove the BSH’s. I normally would have, but I would have had to remove some income positions (something you noted above), and felt like the overall profit potential of the income trade was greater than the profit I could have gotten from the BSH. What I SHOULD HAVE done, was to roll the BSH down. I blew it. I was traveling in Costa Rica with my family on the big down day, and by the time I could do anything we had the bounce. All in all, the BSH’s did the job of protecting my downside and minimizing losses, and leaving the income trades on means I bounced back quickly. I definitely forfeited some profit by not rolling them down, but oh well, I was busy zip-lining in the jungle. Ha!

    1. When the down volume on the NYSE is over 90% of total volume of the day it’s known as a major distribution day (MDD). Pretty much a measure of breadth.

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