Jul 16 – ATM Trade Update

I’m hitting (well above) negative delta limits on my current Aug ATM trade and am looking at ways to reduce it now that July expiration is over and that was providing me some positive deltas. It’ll get more and more negative delta as it progresses into the month so I’ll deal with it daily and continuously raise up that Upper expiration line. This trade represents a planned capital of 5,000,000.

I had the deltas in line a week ago but the reduction in vol and time passing has brought them quickly out of line. The BWBs in August are no longer giving a credit but would give some positive deltas and theta/risk. I think I’ll save those for a larger down day. We’re down about 0.75% today so I’ll have to start looking at PCS maybe even some call structures (call calendars or call BWB). I haven’t had to do that yet post crash as the bwb credits were sufficient in raising that UEL and eliminating upside risks.

I am looking at 3325 calendars, 3250 calendars (mixed) along with a 11 delta 75 wide PCS and I’ve already got some long ES to temp hedge.

So yeah, let’s go over the Aug position:

It is at -1450 or so delta and has pretty significant upside risk to the already existing profit of $125k. So we have to do something. We do benefit from vol release on up moves but it’s not enough. I’d like to get it down to about -700.

Here’s the trade looking forward 14 days

We’ve got massive theta, great risk reward if we get our deltas in-line and decent non-black swan downside risk profile. The previous expirations (from May till now) were a lot easier on the upside so this one will be a bit trickier.

Jul 15 – Update

Given the events of February/March 2020, I had to re-evaluate risk and its presentation in each of the components of my portfolio. Though it was beneficial to add what I consider a god level data point for backtesting purposes, it was not fun to go through. It was the fastest decline and recovery in history. There is no tougher environment to trade through with complex non-directional options strategies. I ended up positive through the event despite the fact that things were broken in the market structure. Things happened that should not have happened. I saw things that I am sure I’ll never see again. This allows me to reconsider risk through what was one of the most market destabilizing events in history. This breaking of various markets and market components has given me a peek into what was naked when the tide left and allowed me to dig deep into my compositions and fine tune with risk management as the main motive. It motivated me to create a systematic approach to my base trades for entries, exits and adjustments. It took 4 months of hard work, but I’ve designed a system that accomplishes all of the risk management goals while maintaining returns that will compound better than before due to the reduced drawdowns. The key to this is maintaining global convexity despite being locally concave in risk profile. This means that risk where it is defined and quantifiable (local risk) while maintaining/financing the ownership of global convex risk on the tails. Short locally and long globally.

The more variant a portfolio is the more it impacts your geometric return. I have an edge, but if I am in extended drawdown, there’s less capital exposed to that edge. The less you draw down the higher your geometric return. It’s the power of compounding and is what Mark Spitznagel calls the volatility tax.  The big losses are all that matters to your rate of compounding. Makes sense right? Manage your risks, maintain an edge and let compounding do its magic.

My primary interest lies in the long volatility tail space and coupling that with localized complex option income production. Globally convex locally concave. The long volatility tail portion of the my portfolio closely corresponds to what Universa, Nasim Taleb and Mark Spitznagel research, it’s a convex payout on extreme market events. When you tie in global convexity (extreme payoffs in extreme events) think of the convex shape (shown below) with local concavity (necessary for regular income production), you end up with the best of both worlds. Absolute protection and income production on the tails (which are rare) coupled with regular income production locally.

The composition of both elements in the options space has benefits that are astounding as it not only gives you capital during turmoil but it protects both a traditional portfolio as well as one composed of options. You prevent event draw downs and have made significant returns that can be actioned at market bottoms. That effect is exceptional. The combination of long vol with a traditional income strategy is what allows for the highest geometric return profiles.

Coupled with the long vol tail hedge, I’ve worked on systematizing the income strategies that are completely mechanical in nature. There is no room for human bias. I worked out a mechanical system that has no decision bias in both the long vol component as well as the income production component.  It prevents the human factors issues that can cause mistakes and under performance. 

We’ve got so many great data sets now, we’ve got the vol events of Aug 2019, the bear shocks of Oct and Dec 2018, the volmageddon of 2018, the time skew issues of Aug 2017, Aug 2015, Jan 2016 and so on. We’ve got a plethora of data. The period from February to June of 2020 used this data to do a deep dive into restructuring the portfolio and analyzing its risk factors. It was long, arduous and sometimes frustrating when you realize that everything has risk and the only true way to eliminate or minimize is by true diversification. 

The lock down forced me to work long hours daily to re-evaluate my systems and to fine tune a new system setup. This was a period of heavy backtesting, reading, daily hour long phone call discussions with a trade buddy, trials, and analytics.  I left no stone unturned even exploring things I would normally say was trade style heresy. The main discovery is the need for systematized approach in all base core strategies. The management is systematically rules based. My entire portfolio will follow this tenant. It’s a minimization of human factors. As Jerry Parker puts it :

“We are not really interested in people who are experts at the french stock market or german bond markets due to technical nature of trading…it does not take a huge monster infrastructure: neither Harvard MBAs nor people from Goldman Sachs…I would hate if it the success of Chesapeake was based on my being some great genius. It’s the system that wins., Fundamental economics are nice but useless in trading. True Fundamentals are always unknown. Our system allows for no intellectual capability.”  Jerry Parker

Related to the above statement, I’ve had a realization to systematically use quantitative analysis and trend indicators to manage trades with respect to risk, entries and exits. QA gives me a way to manage the trade risks systematically while keeping me on the right side of the market trend, it’s what the university endowments use and it’s what Jerry Parker helped systematize in the 80s and 90s. I am using it to err the trades in the direction where the sum of the quantitative analysis points us.  The delta adjustment range is -3 to +3 per unit. If it’s a bearish trend, we’ll keep it in the -3 range and if it’s a bullish trend we’ll keep it in the +3 range. Lastly, it lets us know when to exit trades. If we use Vix/Vix3M ratios, force index, OBV, ATR expansion etc we can avoid every major event in the last 10 years. I have now incorporated mandatory exit signals. If the signals do not show and we have a black swan, that is protected as well because of our long vol component.

It’s important to have a system that removes emotions and biased decisions. It removes human factors and that gives you something that’s concrete and sustainable. Decisions cause fatigue especially when tied to large money. Through the lock down, I tried investigating several things with an open mind, including taking advantage of zero day premium trades (PR hedgies)  and cycle indications trades. This led me to making polarized decisions on an hourly basis. That’s not sustainable, it’ll exhaust and it’ll burn out. It solidified my requirement for a systematic rules based core portfolio. You can adjust/fine tune the rules but you cannot disobey them once they are live.

Post Covid Crash update – May 5

Been a while, I should have kept posting through the whole event. I am up about 20% on the year which is decent given the events and given several mistakes I made. I’ve since revised how and what I do in my process and can only be thankful I ended up positive through-out.

Bizarrely, I was super in-tune with the whole virus thing back in late January as the first reports were coming out of China. By early Feb, I had got out of my entire standard equities portfolio (TAA –Tactical Asset Portfolio blend) and purchased 400 long puts ~ $1.00-$2.00 in anticipation of some volatility thinking I caught it earlier than the market. The market just kept going up and up and up until Feb 24. I had no real OTM trades on and had built up some long-vol portions but the nuances of en-cashing was where my regret lies.

On Feb 28th, I started cashing out of those 400 long puts which took a beating through the mid part of February. Had I kept them on till March 24th they’d have been worth millions. Just before that, on the 27th, with the VVIX spiking the highest since Feb 2018, I also started opportunistic OTM trades that got annihilated despite being hedged with Black swan hedges. A poorly timed entry, every indicator was flashing off so I should have waited for a bottom signal before entering but at the time I figured that the virus news would cause a more lengthy decline with several bounces in-between so I figured I could get in and out using vol relief on the bounces to capture profits. I was wrong. The mess lasted till Mid March and lost a bundle but was offset by my long-vol and BSHs. Though, I did take a pretty big temporary hit on mark-to-market throughout. Anyways, to go back a bit, on the bounce in early March, I picked up another 450 long puts at 1800 for $3.00 and I was going to convert into a BSH factory but the market collapsed almost immediately after I bought them (lucky). So I followed the trend down converting slowly into fully formed BSH and used them to hedge off the OTM trades. I was keeping that left tail popped up. By the end of it all, the combo was green and all was fine.

In Mid March, I started using OTM calendars on bounces as an income capture. As well, to offset the long vol hedge that was incredibly negative theta positive vega until I got a signal to encash, I started selling 5-7 DTE puts in ES after-hours at ridiculous prices whenever they came up and used that against my long-vol (calenderizing the long vol hedge that was 90 DTE). This all worked out really well and I was able to capture some really ridiculous pricing. I saw 1000 SPX puts going for like $10 I am pretty sure.

By April, I started doing BWB ATM trades on dips for large credit (usually they are $4 debit!) with 40 DTE. On bounces, I’d add symmetric flies. I’d rinse repeat this in a nice ratio to maintain decent profile and am still doing this now.

I’ve become a fan of using trend indicators for risk management and that’s where my interests lie right now. In this environment, I’m setting my portfolio to be mostly locally concave with respect to selling premium (ATM income trades) yet my overall portfolio will be global convexity (long vol). I won’t sell asymmetric risk rather I’ll own it by using some BSH type factories and some usage of OTM strangles and I’ll sell more defined risk upfront with ATM type strategies. It’s the environment we’re in and with the credits (removing upside risks) in the BWBs, it makes management much easier.

Since I am doing my own blend of things I can probably start posting more risk profiles and trades so I’ll start doing that.

Year end Results and 2020

2019: 29.83%

2020 YTD: 7.6% (What a good start to the year!)

Total from Jan 2 2019 to Jan 15 2020 : 37.43% on total balance.

During the last 6 months, I’ve spent probably 6 hours a day (when I am not traveling :P) trying to design the most diligent portfolio of trades that I can. I am basing it on the tenant that a series of well diversified trades or portfolio compositions will provide a better risk adjusted return that in turns lowers my variance and stress and keeps my humanity out of it. Not only does it reduce variance and risk but it has a positive affect on human factors (the humanity part). If you have 10% of your account in a single strategy, you’ll be less apt to get cognitive bias and other negative human attributes involved. I am sure everyone has experienced that before, when you’re in an ATM options trade and you’re at an adjustment point but the technicals all point to oversold and you want to wait for a bounce to adjust, yet it doesn’t bounce? Yeah, that’s human factors. You realize you fucked up so now you’re looking for an opportunity to adjust and emotions get involved. I’ve been there. The V of 2014 was that time. Things that are extremely overbought get even more extremely over bought..It is momentum. If any given trade strategy is a smaller part of the portfolio you’re less apt to do that. I haven’t really done that in the last few years but it’s something that many newer traders struggle with. When you search for reasons or search for confirming evidence to avoid adjusting in a rules based trade then you’re introducing new variables into what was a thoroughly backtested trade. It’s not the same trade now. Follow your rules. All of my trades are now non-discretionary rules based trades.

Having been through 5 years trading complex options positions through what feels like everything (short of the flash crash of 2010). I consider myself now fortunate to have suffered immensely through the following environments because it set the stage for a very strong development of resilient well diversified and non correlated trading portfolios that gives me excellent risk adjusted returns. At the time of each of these, I am sure I was in some pain but they all taught me how to risk manage and to be a resilient and careful trader:

  1. The V bottom of 2014
  2. The crash of Aug 2015
  3. The prolonged bear move of Jan 2016
  4. The extreme low vix environment of 2017 AND the subsequent highest transition VVIX move to Volmageddon
  5. Volmageddon – Feb 2018
  6. The no activation of hedges environment of Oct/Dec 2018
  7. The tweet environment of Aug 2019

I am hoping this year beats the last, it actually was a very slow year in terms of trading, I had almost no structures on from September on. I had to rely on my LTI portfolio until December when I was able to get a few structures on.

I am traveling a bit this year, going to Miami today to play a poker tournament, LA in Feb, a transatlantic cruise end of April with a brief two week tour of EU again. I return for the WSOP in Jun and July and PSPC in Barcelona in August. After that I have no idea..#travelsandtrades 🙂

More to come..

ATM Trade Update

Here’s the risk profile of a current ATM trade that represents about 1MM in planned capital (for my use). It’s 100 1620/1580/1530s and 100 1600/1560/1510 butterflies. Fully scaled in. I’ll adjust on the upside when delta hits -250 or so and will roll the butterfly down if we exceed short strike by 30 points.

ATM Trade

Pretty much all I have on re options trades right now. Waiting for entries. The LTI portfolio is fully entered for the month so I wait until next to rebalance.

Dec 3 2019 – Trade Updates

The last two months have been quiet for me. The low vol run up meant that I had no STT trades on and I was left with just the LTI/Tactical asset portfolio along with a few ATM trades. Still at about 30% for the year and any big down move that causes a VIX 22/23 move along with some evidence of capitulation/forced selling/margin call will allow me to enter a nice STT that could catapult the return to 35-40% for year end. We’ll see if it happens.

Today’s down move got me perked up and I am keenly watching for entry opportunities. If it doesn’t come, it is what it is. We’ll keep waiting. In the meantime, I did enter some ATM trades today using the vol to get decent prices. It’ll give the portfolio some potential for a decent year end. I’d love 35% but with these opportunistic trades, profit will come in bunches. My backtest shows that 2018 would have been a 100% year if I was entering with the same parameters I have now. Today, we hit 18 vix and I was hoping for an EOD type sell off and a further weak open to eye up some opp. 484stt with elevated >22 VIX but alas we bounced into close.

The idea going forward is to do the TAA blends, some ATM blends and opportunistic STTs (I might only get 1-2 a year but they’ll boost the TAA+ATM for a solid 40% average return over time). I can post all the ATM stuff I do without regard to the IP restrictions of the group so maybe I’ll start just posting my daily updates of the ATM trades so there’s more content and commentary here. I’ve halved the PC for risk purposes but it boosts the LTI returns while we wait for STT opps. I much prefer to be patient and wait for great entries than to deal with extended down moves and vol increases with OTM type trades.

I had a busy few months traveling, which I guess was good timing with what was a “never go down” market until now. I hit up LA with my family to look at schools for my kids, then met my guy friends there and departed my family and had a guys trip that extended from LA to Denver and Miami. Good time but when combined with my last trips in September, my liver needs a good cleanse.

Oct 10 Trade update (STT-488,STT-484 and BSH Factory)

On the 8th of Oct, the market fell pretty hard into close and the skew/vol were favourable to enter a 488 STT, so I did. I allocated about 25% of the planned capital as the conditions weren’t quite good enough for a 50% or full entry. I was able to cash out at 40% profit target the next day. I did. Why did I only do 25%? There’s probably 25 entries since 2014 where I’d go 100%, however that said, I have to re-evaluate my criteria as it was implemented for the 484 which is a slightly different trade. I may lessen the requirements for the 488 by a fear spike and VIX 18+ for at least a 25% allocation. (VIX is really a very crude way to measure the entries, I just say it because everyone knows it and what it represents re market conditions..but in reality I’d be looking at a whole slew of things to determine entries). If VIX is above 27 and we have a capitulation day, I’d probably switch to 484s unprotected but everything below that I think a 488 might be the answer. I still have to confirm backtest everything and how the exact opportunistic entry system will work but for now it’s a start.

As mentioned a few times, right now my portfolio consists of a blend of a TAA base, some bond rotation (low vol–municipalities, senior loans etc etc), a strategic LTI portfolio, some sectors rotation and a cute factors system. The above represent a 0.75:1 on capital. Then on top of that, I have an active BSH factory for income and lotto. The BSH factory method I use now produces 18-20% a year but will return incredibly during an Aug 2015 (161%) or Feb 2018 event (62%). This is a producer in large events (crashes). On top of that I have 15% allocation to at-the-money (ATM) options trades such as the Rhino and bearish butterfly. If we have any large vol events (opportunity) I’ll enter 488s and 484s. This is my portfolio.

I closed out most remaining options trades except the allocation I have to ATM Rhinos. I have a bit of January left and that’s it. I will work to close those as the next week or two go by. Mostly in cash in terms of options allocations. I am forming a new BSH factory to try and up it’s size relative to my account, it was a bit lower. Not a whole lot else to report on re trades.

Oct 3 – STT and TAA Trade Updates

The account just hit 30% for the year which puts me at about 10% a quarter. Happy about that. I was hoping for a better (greedy) end to the trades but the market movements prevented that. The market stayed in the upper range and started to tap on 3020 which forced me to start balancing the upside risks and after about 10 days I just decided to lock in profit and remove significant portions of the trade. If I had done nothing, this sharp little 160 point drop would have netted much more. Just this afternoon on that very sharp rebound my account hit all time highs so I took half off and removed a lot of my risk. The sharp little flash crash today from 2892 to 2857 had actually knocked the P/L by almost 4% but now its fully recovered and well profitable (and most of the risk is closed).

As mentioned above, I decided to close off half of the account today on the bounce to 2905. The Dec STT dipped down about 60k during todays mini flash crash from 2892 to 2855, albeit that’s likely just temporary due to option pricing gaps between bid/ask but has since recovered to +10k on the day. Good enough for me and given the market movements and the news climate. I will wait for some opportunistic entries and be happy with the profits to date.

Funny enough, I entered 40 units of 488 yesterday and they hit 1/3rd profit target today on the afternoon ramp. I took it. I’ll always ladder my profits according to days in trade especially if it’s within the first week. One thing we must be careful of is that if these are opportunistic, and you’ve got nothing else planned, then if you start taking lower profits (the profit target is $1k, I took about $380) and you have a max loss of $2k, well, this could be a problem as you’re not capturing enough of the 1k wins to offset the max loss. However, for me, this entry wasn’t the only thing I put on and I mean, it was within one day. Any further down move, I’ll slap some more on with less vol requirements as I had with yesterdays.

I am becoming a big fan of risk reduction via non-correlating strategies. So I am more and more starting to add in a variety of things both as a base as well as opportunistic. I’ve got a solid momentum based TAA along with low vol bond rotation as my base.  It draws upon theories from several white paper authors in the tactical asset allocation realm, such as Keller and Keunings white papers on Vigilant Asset Allocation, Protective Asset Allocation, and Generalized Protective Momentum as well as Gary Antonacci’s white papers on Dual Momentum factors and his Risk Premia Harvesting paper. I’ve setup my own little combo of these and other things to create a nice long term strategic base portfolio that produces ~11% CAGR on average with a 5% MDD since 1990. Will it produce this in the future? Who knows, but that applies to anything. I worry mostly about the safety rotations ie IEF and TLT and as such I’ve mostly removed TLT as my safety rotation and changed it to IEF (that helps temper expectations a bit) . I mean, the last 10 years, TLT has produced 10% per year which is equity like w/out the equity risk. That won’t last. If we have a long period where rates just stay stagnant the returns are much much less. If rates fall to zero then it’ll be great (initially) but after that any increase will be horrific (for returns on TLT/IEF). So yah, bonds will def underperform going forward and much of these backtests rely on rotation to bonds so we have to be careful not to expect the same, that said we probably have 5 years before we have to worry about this.

I started to add in Rhino’s again and I actually got some on at 86c yesterday. That has to be a record price for me and I’ve been trading them on and off since 2016. That’s another opportunistic entry.

The plan going forward is to run the base portfolio (which consists of 8 different strategies each adding some non-correlation) coupled with the BSH factory, a variety of ATM trades, and finally opportunistic Rhinos and STT.

Sep 18 – Trade Update (STT Trade)

I recently (and finally) hit profit on that trade I was nursing since Aug 1. I probably over-hedged a bit during Aug as the skew and vol went haywire and the modeled positive deltas were just a bit too overladen with risk. I probably entered 20% too many bearish stt and probably sold a few too many ES shorts but at the time and with the bipolar nature of the market on any tweet, I felt it prudent to eliminate some of the risk. Further, on the subsequent up move I just couldn’t convert the bearish STT as quickly as I’d have liked too but hey profit is profit. There was a lot of whipsaw too that crushed some of my ES short hedges. The big positive was that I managed risk like a boss but the negative is that it’s resulted in under-sized return as I wasn’t able to take advantage of the vol and skew present because I was managing risks of low vol entries. I’m now moving my trades to opportunistic entries only. I’m talking big down days where forced liquidation are occurring.

I’ll end the month of Sep having made about 3% maybe 4% from Aug 1 to Sep 30th. Not terrible given the environment re skew/vol and the news environment. It got a bit crazy there with tweets. I think I’ll end Q3 right at about 30% which is 10% per quarter on average. I am happy with that and it’s in-line with what I figured. The next quarter results will be entirely dependent on opportunistic entries. If we don’t get the right environment, I won’t be able to enter the juicer STT options trades and I’ll be reliant on my base portfolio and BSH factory. Is what it is…happy to wait for opportunities because when they occur it’ll make up for the stagnant times.. The conditions I’d like to enter in have happened just 25 times since 2014 so it’s going to require patience. The returns from those entries are much higher and you can often get out within 11 days (that’s the average length of time). I’ve seen that the trades will produce the same overall, with very small chance of large draw down and very little time at risk. I mean, the average days in trade was 11 and there were 25 of those, that’s 275 days at risk out of 6 years of trades (That’s like 1/7th of the time).

I leave on Friday to Necker to celebrate my 40th and 20th anniversary. I have no idea what to expect, it’s pretty damn ridiculous but we pulled the trigger because well, it’s two huge milestones. Maybe its worth it maybe its not. I won’t know for another 2-3 days. I imagine there’s some life value in going…maybe? Wildy, and good timing, just two days ago I did have a pretty awesome poker score when my coach got 2nd place in a WCOOP and I had a piece of him. It netted me more than enough to cover the trip, and covers poker buy-ins for a while now. LFG. Anyways, it’s a perfect time because luckily my trades are neutered and carry barely any downside risks and I can just unwind and leisurely work on some projects I have going on. The onllly issue right now is that there’s like a hurricane forming and moving right towards where we are going. Hopefully it fucks off.

So I probably have 2 weeks left with my current STTs, I have about 70k theta per week and by Oct 10th I’ll probably be fully out of the market re STT type trades. I’ll have a small BSh factory and some LTI stuff and I’ll be sitting and waiting for a big down move. Any 5-7% move down is while I still have on this structure would be worth a LOT of return (another like 10%)! So it’s welcomed! If that happens, then my luck is disgustingly sick and I’ll be removing the entire thing and entering brand new ones. Easy plans going forward.