May 2015 – Page 2 – Travels and Trades

May 11 – Trade Plan

With Friday’s upswing, the account has reached all time highs again.

The MICs are all all now profitable for June, which, given the crazy whipsaws, is nice to see. I’ve had to make significant adjustments across the board. Another big whipsaw will surely start to hurt the trade a tiny bit.

The Protector Alpha is at highs as well. I think it’s up about 4% for the year. Which is great considering its a fully hedged portfolio of equities. The hedge so far is costing nothing when comparing our overall portfolio to that of the market. Can’t complain.

I’ve been reading about Jeff Augens weekly butterfly strategies and have been backtesting them through the weekend. I’m most interested in the extremely short duration short butterfly. It’s put on at 1PM on Friday and closed in the last half hour of trade. The results are promising. You’re taking advantage of pricing distortions in the last 30 minutes where all options theory goes out the window. It’s an extremely high volatility trade with losses in the 40-70% range and wins in the 80-120% range. Seems to be coming out at about 10% over the last 6 months. Will update here as I further backtest a variety of equities. So far I’ve been looking at AAPL. I’d like to get 2 years of backtesting for about 5 equities before putting on any test trades.

The past 3-4 years, all I’ve done is look for new trade ideas that fit my personal trading/risk profile. I’ve been down 100s of paths and only have found a few worthwhile. My bread and butter is the MIC and Protector. So you can say, that those are the ones that made the cut. I’d love to have some shorter time frame trades added into the mix. I’ve been down this path (weekly butterflies) but abandoned it when I got stupid in my rookie days with AAPL credit spreads.

May 8 – Trade Plan

There is three reasons why the market is likely to pull back.

1) VIX opened and closed above its Bollinger band. From Cobra: 81% chance of market revisiting the Apr 6 lows

2) The RSI made new lows and hasn’t show positive divergence. Down momentum is strong

3) The last down leg exceeded the 100% measured move which usually means another leg is likely.

What’s my plan? I’ll probably adjust slightly on any big bounce to make sure my deltas are zero to slightly positive.

May 7 -MIC long put idea

I’ve been giving thought to changing the way we buy long puts. Usually we purchase 2x long puts with the same expiry as the trade. Usually its closed for negligible value. The average cost is about 4,500 a trade. It’s our black swan insurance and its part of the business. Caught without it during a flash crash or other similarly crazy event and you’d have catastrophic losses. However, the thing is, there has to be a better way, and I think I’ve got one.

Disadvantages of the normal method

1) Theta on the long puts is high, they’ll likely be worthless @ time of closing the trade

2) Since the extrinsic is low and gets lower as the trade goes on, volatility has less and less of an effect.

My suggestion is to purchase year out puts about -20 delta and sell 25% against each trade period to offset the costs.

Benefits of new method

1) You have way more extrinsic value so any increase in volatility will have a much more positive effect

2) Theta on the long puts are drastically reduced

3) You end up paying for the insurance over time thus saving the trade about 1-2% a month!

Just need to try and backtest different parameters and see if this thing could work.

May 6 – Trade Plan

Yesterday was a solid down day and I used it as an opportunity to enter in more units of June MIC. I’ve got 40 units total on right now with entries all over the place.

The market has had 25+ Fugly days but nothing thats really carrying on much past a day. It’s 1-2% up and 1-2% down. Trendless within a larger bullish trend. It’ll resolve one way or another.

The thing is, you rarely have triple + tops and the more we consolidate here the more likely we bust right through that resistance @2120. The more times it knocks the more likely it’ll get through. The season is bad, the indicators suggest more likely down than up but we either have to move down soon or we’re likely to clear up and create new all time highs. I think this will resolve in the next few days especially around Fridays NFP number.

May 5 -Trade Plan

We’re mostly out of the May MIC trade and sitting at around 5.8%. I’ve got like 10-15% of the trade still on and might be able to eek a bit more out of it. Maybe 6.2%?

The June trade is now about break-even. Expected after the recent ups and downs. It’ll continue to gain in time decay as we go forward this week. I would expect to see it at around 1-2% next week if we have only modest movements in the market.

Weekend Post

So pretty much Thursday didn’t happen? SPY rebounded and is poking at near all time highs after a pretty significant drop. RUT/IWM had a much softer bounce. The market for the first 4 months, has only gained 1%. The trailing P/E is 17.5x (pretty high) and from Fat.Pitch, if the market continues to trade at this P/E and anchors itself to EPS growth (2%) the market can chop for many more months. This should be a good period for the MIC trades.

I did use the bounce as an opportunity to even out the deltas a bit in the June trade. We’re just slightly delta positive with the next adjustment point at 1210 and 1265 respectively (RUT @ 1228). If we have more upside on Monday, I might sell a few more call spreads to get the delta closer to 0. Then wait for a down day to add more full trades.

The May RUT MIC is sitting pretty at 5.5% and we’ll likely be able to complete it around 6-7% early next week. Downside is actually welcome as we’ve got a lot of debit spreads and a wide range. We pretty much have no upside risk and we can manage anything but huge gaps down. There is some chance of a big month (8%)

The Jun MIC is sitting around a 1% loss but that’s completely normal this early in the trade and with this much volatility. By Monday it should be at 0. The most desirable situation is closing out May trade sometime early next week then having a second leg down which would give us the opportunity to enter more JUN MIC at better prices.

I currently use a ratio of 3:1 for puts to calls spreads. I might up it to be more like 2.8:1

May 1 – Trade Plan

Wow, what a day. Forgot what one of those were like. Had to be alert and paying attention for the first two hours as RUT proceeded to fall about 30 points and stretching its daily Bollinger band the most it has in 18 years. Just a few days ago Rut hit 1274 and quickly fell to touch 1216. That’s a big big fall to happen right at the end of the May trade and as well at the start of the June trade. Difficult and stressful but opportunity arises from the debit spreads (we typically make our 7-8% when we’re in the window of the jeep (the window gets bigger with debit spreads). After the first two market hours, I was out having sushi and sake most of the trading day and unfortunately was on call with mr. market.

Overall, I am happy with how the adjustments went but had some difficulties getting fills and things moved quick. I had to work for my money yesterday. Obviously could have done way better in fills and ideally as it hit 1234-1235 I could have gotten in my debit spreads but I couldn’t get decent fills and it fell quickly to about 1229-1230 and I patiently waited to get fills on 20 point wide debit spreads for both the May and June trade. When it rebounded to 1231-1232 I got filled at meh prices but at least I didn’t pay for those when it was at 1228 or even 1216 later in the day. It’s part of the game. Quick falls = premium prices paid for adjustments. They are necessary though. I perhaps should have bought back puts on the put credit spread instead. Either way our delta hit about 33 so it wasn’t too bad. Further in the day, I got another alert when it hit 1225 and logged on my phone to see it fall all the way to 1220 (and touched 1216). I had to do a smallish adjustment around there which I am sure I over paid for but, again, the adjustment was not on the low of the day, so I can’t really complain. It could have been worse. The call spreads are all removed now for our RUT May trade. Risk is only to the downside and as long as there are no big gap downs, it’ll be relatively painless to manage. Time decay is large right now so we should reach 6% by Monday and maybe even 7% by end of trade. Time will tell. Consolidation in the market would do us wonders right now! The trade is sitting at just below 5% right now (we had been around 5.5%). Yesterdays fall does give us more potential in the trade, with only 14 days left, and the risk being on the downside, we can add puts/debit spreads on a big fall and benefit from the big time decay if it bounces or stays neutral. The trade for May now has more potential than before but we’ve taken a little hit yesterday as volatility increases the prices on what’s left.

The June RUT trade is down about 2% as expected, we just put it on and the volatility increase raises the prices on all the legs. As time goes on the volatility (which is directly linked to extrinsic value) will start to deflate. Completely normal. As mentioned, it gives the trade a bit more potential.

The SPX trade is neutral. It did well. I put on the bottom legs on a big drop a few days ago so it really wasn’t affected.