Nov 26 – Trade Update

Edit–I didn’t find I was clear enough on some specifics related to BSH activation and the KPBR and I was pretty emotive while presenting something in a very confusing manor. I am a big advocate for the original PMTT BSH and in fact my main base trade is a BSH factory for both income and hedging as well as a Jeep STT variant. My sole two OTM trades are centered around the original concepts. My frustration and emotive response was in relation to the exotic structures that I saw got some people in trouble.

So to get into it, my original post was not really clear re how OTM and BSH trades were affected in the Oct and (now even Dec) events. The VIX did not spike as much as it should have thus BSH trades acted accordingly BUT so did the STT trades. They compliment each other. The STTs were totally fine through Oct and Dec as anyone can find out re backtesting and who’ve traded it live and thus the BSH activation wasn’t needed. The same thing that affects the STT is the same thing that causes the BSH to activate. It activates in a black swan and this move was not a black swan. You manage these moves with the relevant downside adjustments and you wait out any small vol/skew draw down you might have. If the STT isn’t affected by an event, then you don’t need the BSH activation and so on. I was clear in my original post that I didn’t have problems and was doing great in my main IB account, and that’s because I had on original structures and not the alternative exotic ones.

The thing is with the alternative search for other cheaper BSHs, which people created to break even or even slightly profit (no cost BSH?…too good to be true eh?) there are always trade offs. In this round of creation, people were looking at types of ratios that many realized too late, had this sea of death issue that hadn’t triggered in previous backtests per say. If the move down is slow and controlled, you’re going to get in trouble. The attractiveness came from the fact that it was theoretically free most the time. The ideas is that the ratio style BSH paid for itself. The problem is that it was meant as a hedge and if there are situations where it trends with your income trade (ie doesn’t hedge it) then it could present unexpected problems. The thing is, now that we’ve had this move, we’d also have this data and had we backtested it thoroughly w/ this data previous to this event, we’d have seen that 🙂 So yeah, the VIX not spiking as high as it should have re the move that occurred did have slight very temporary affects on the income OTM trades but they were totally manageable and expected but the effect it had on exotic KPBR/KH type hedges was pretty horrible combination. Resulting in the income trade but also the exotic KPBR type BSH having double whammy draw downs. This can escalate account issues quickly. The trade off isn’t worth it. I was fortunate enough no to experience that because I stuck with more traditional approaches

(Original Content with some edits)

What an interesting month October was. The market fell pretty hard and not only that but the technical indicators on all sorts of metrics deteriorated to points not seen in a long long time. A lot of damage was done and the market won’t recover without a lot of reparation.

The KPBR hedges (not a PMTT trade) failed miserably and a few people that ventured away from the standard setups experienced a lot of pain. These types of exotic structures not only did not activate but also lost significant money and when combined with temporary P/L issues/vol draw downs in OTM trades, left some with balance issues that can cascade into margin issues etc. It didn’t affect me (I had standard BSH protection on) but it affected other people. What did affect me was margin expansion issues and broker (systemic) issues especially at EDF because of the HS3 (another alternative non-course related trade that’s probably going to be shelved by most people). My main account (@ IB) is crushing right now which is nice. My EDF account is down modestly through it all from its peak profit. Mostly because of broker panic issues and margin expansion of the HS3 (I won’t trade this again). In fact, as of Jan 2019, I am actually just trading a BSH factory (Income and Hedge) and a Jeep version of the STT (as per the PMTT course) and that’s going to be it.

To me, this last period provided us with the most interesting back-test data period that I’ve ever seen. It was a swift but controlled fall of just over 10% where the VIX did not spike nor did skew change all that much which showed which trades were swimming naked as the tide pulled out. The trades that were naked were more of the exotic new versions developed. This was interesting and helps us see and test ideas even further. It shows how OTM trades do in a 10% decline where BSH activation does not really occur. It’s given me all I need now to fully construct trades that take into account BSH protection including swift but controlled moves down, systemic/margin issues including expansion and loss due to temporary P/L issues and so on. I believe we’ve got all the pieces to the puzzle for some smart refinements to the existing trades.

I got approved for an IOM seat at CME which gives me much reduced rates for futures. I’ll be paying something like 77c total all in for each futures options contract. Sweet.

Poker: I played the online party poker millions yesterday with 20MM guaranteed. Busted 550th out of 1600 when my TT vs 66 had the opponent hit a damn 2 outer 6. If I won that I think I would have min cashed at least for 5x my buy in. Ah well. Such is my luck in poker. Getttttting siiickk of it.

7 thoughts on “Nov 26 – Trade Update”

  1. Just to clarify, the math would seem to suggest a return of 140% over 3 years, if you compound at 2.5% a month. Your terminal value would be 2.4x your initial stake. Not sure if you were suggesting that the return would be 240% or not.

  2. Can you also clarify:
    1) What do you mean by: “…HS3 (I won’t trade this again)”?
    Are you abandoning the HS3 trade? Can you explain the margin expansion issue with the HS3 trade?

    2) For the combo trade that will do 30% non-compounded a year. What amount of margin is that based on.
    What trades are combined to make this combo?

    1. Hi Steven,

      1) Yes, I’ll not be trading HS3 any longer. I didn’t like how it reacted in th Oct event re both its P/L as well as the systemic issues it caused at my broker. You’ll find any futures broker won’t understand it or its risks and they’ll be on you like white on rice during events (I was getting calls/emails every 30 min sometimes 🙂

      2) I’ve done extensive extensive testing on that specific trade and decided to shelve it due to the number of contracts it requires and the difficulty it would have re neutralizing during an event again due to the # of contracts. Slippage factors into both of those. All of that relative to the periods of potentially very low P/L was a clincher. I’ve moved more or less towards full out BSH factory (Income/Hedge) and Jeep versions of the STT

  3. With the reduced annual returns, are you tempted to mix back in the MIC trades? It seems like a Jeep/Weirdor + Rhino combo portfolio would do similar returns with no risk of margin expansion issues.

    I ask because thatʻs the direction Iʻm heading in – though I am only up to date through HS3/Montana before I dropped out of the MM. No regrets, I learned a lot, just curious.

    1. I like the Jeep-PMTT version as what feels like almost a hybrid of ATM/OTM type trading. That and the ATM rhino.

      The HS3/Montana were all great great dives into OTM unknowns. That 2017 year (especially the summer) was insane for trade creations and exotic structures but now we’ve since gone back to basics. We turned over a lot of stones.

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