Sorry for the lack of posts lately, I came down with a throat/chest and ear infection combo deal that had me bed-ridden for days. Luckily it subsided with some antibiotics right before Christmas day.
I’ve been spending a lot of time reading about active portfolio management. I’ve got three books on the go and one in particular that I’ve found quite interesting is “The Ivy Portfolio” by Meb Faber that talks about Ivy league endowments, and most specifically the Harvard and Yale endowments. Further to that, I’ve also spent time reading some research journals on momentum and 13F Cloning which are all quite interesting ways to obtain additional alpha.
13F cloning is basically taking the top 10 holdings of a hedge fund etc. These funds (over 100M) must report their holdings every 45 days. Since most aren’t actively traded, you can gain by copying their holdings and you don’t have to pay the 2 and 20 fees they usually have. Research shows that because you save on the fees and though its 45 days late, you can still generate around the same return. I’ve got a list of fantastic funds to follow, and thus I am interested in creating a fund of funds using the top 10 holdings of the very best funds like Baupost (Klarman), Appaloosa (Tepper) etc.
What makes me excited is our little insurance tool that we use in the Anchor strategy. This protects us in crashes (well really any market downturn). We usually only use a basic ETF like SPY or RSP but with the case of 13F cloning, mechanical investments and other methods of creating alpha that I am looking at, we can combine this insurance method and create more return with absolute protection in any major correction. That has me very very excited.
I am gearing up to setup a nicely diversified active trading and portfolio combination for Dec 31st/Jan 1st. I am excited about it. It should be a great 2015. Well diversified.
And for the first time on the blog, I’ll be finally doing some traveling! We’ve booked a cruise on Jan 3 till Jan 14 around the Med. We’ve done most of the stops before but it was cheap and we’ve got our Au Pair. So it should be awesome. I haven’t had a vacation in years where I wasn’t actively managing stressful trades. I am quite looking forward to it and doing a lot more heavy reading/research.
Expect daily updates from here on in!
As I look now the futures are at 2071 suggesting a 2076 open @ fair value. Just a few days ago we touched 1976. That’s nearly a 100 point or 5% rise in a matter of what 10 trading hours? Incredible. I think the most market participants are jaw-dropped. It’s the way 2014 has been – the year of the V-Shaped rallies. Look at the chart below. That down was something else, but that up was even more sudden. I explain below the likely reasons for these rallies.
These types of rallies are by in large caused by a few things
1) short-selling and subsequent covering. It’s momentum. Once the bull starts to run, you get panic shorts hitting the stops and being forced to cover (buy stocks back) which further fuels the rally. As long as you have a large amount of skeptical bears in the market, you’ll get these violent rallies. This is typical of a bull run that has a lot of negative sentiment accompanying it ( i.e. like we’ve had the last few months : weak data, oil problems, Ruble problems). There’s a lot of shorts and if they break their stops, this causes violent upswings.
2) In the October fall, you had a lot of funds/institutional investors underweight equities after the very sharp reversal. It gave few any time to get back in and many waited for the typical pull back after the first fall. Most of the time on a downtrend that strong, you’d get a second leg or at the very least some stalls and retracements at fibonnaci resistance levels. They can only go so long for the predicted pullbacks until conceding defeat. This pullback did not happen in October, the up was relentless and broke all sorts of records. The under-weighted institutional investors perpetuated this rally as they chased it. The pressure to buy was strong. Simply put, the pressure to at least match the market is strong for these types of investors and they simply can’t underpform the market or else they look foolish. That fueled the rise in October and likely fueled this one as well. This fall was a gift for the ones still underweight and as soon as the selling pressure stopped you got a massive up-swing like we’ve seen the past few days. Everyone was hoping for a dip, they got it and the old adage ‘fool me once’ probably played a role in the even more sudden V-rally this time around. On just a bit of strength everyone pounced in. Nobody wants to miss the next V-rally especially after they’ve been praying for a large pull-back.
At close there was a p-bar that touched 212.97 on SPY. Likely that’s the target for this bull run. The season favours the bull as well. They call it the santa claus rally. I’d expect strength going into the end of the year.
I am out of the MIC and in just the SPY/TLT and Anchor trades at the moment. Yesterday was a good day for the anchor.
Well, the market opened about 23 points above yesterdays close. In just 2 days the market has gone from 1971 to 2042. That’s almost 75 points. Incredible. I’m glad I’m not managing an MIC right now with that gap up.
Right now I am working on constructing the details of a trading portfolio made up of a few different strategies. This will provide greater diversification, less active trading and more stability.
I am going to activate this portfolio on Dec 31st and post daily/weekly results here on the blog.
I’ll be doing
1. Earnings related volatility trades
2. Anchor Trades
3. Momentum Trades
4. SPY/TLT pair trades
The SPX is about to close about 45 points up from the open. Incredible. That’s a 60 point swing from the overnight lows. I am so relieved to be out of the MIC trade. I just don’t think I can do that sort of trade any more. It’s too stressful and requires too much active management. I am now moving towards a trading portfolio that integrates the SPY/TLT pair trade, Earnings volatility trades, Anchor portfolio, intra-day breadth trades and a Momentum portfolio. My new focus during spare time will be on active portfolio management in these key areas and a lot less on having to be tied to the computer making adjustments and stressing about overnight moves. I’ve literally probably not slept about 5-7 nights in the past 60 days. If it wasn’t Japan introducing QE, or China lowering interest rates, it was the Ruble and Oil crisis. Just not healthy for me or my family. It’s definitely not worth the 3% a month stress.
We’re now fully out of the MIC. I don’t have the final numbers yet but it was profitable.
We’re doing great here. We weathered that downswing like a boss. The market fell 5% and we were barely affected. This is a true “sleep at night” portfolio. I am coupling it with a few of my own tweaks
1. When market breadth is negative via sghammer.com I’ll be switching equities to ATM spy puts 4 weeks out
2. When market breadth is negative via sghammer.com I’ll be adding a TLT credit spread
This will be the anchor of our trading portfolio. It’s what I’d do if I started a fund. It’ll slightly under perform bull markets but it’ll consistently return 8-12% during bear markets. Leverage this up and you’re sitting pretty in a completely insured portfolio.
TLT/SPY Pair trade
I was able to finally enter the TLT roll today as TLT fell from 127 to 126. We’re now up on the trade by about 8k.
I haven’t entered this yet. I’ll be adding this January 1st after I do more research and prep work.
Yesterday did not go like planned. There was a an 80 point swing from high to low that caused a lot of whipsaw pain as we closed our trade. They were quick and fills were a big issue. Incredibly annoying and a testament to why I am getting fed up with this trade type. I am over it. There’s better ways to make money in this market.
We’ll still close the trade at a profit but nowhere like we expected. It is what it is. The market opened at 198-199 and proceeded to go right to 202 and then back down to 197.8 in full swoops. Huge intraday moves. Hard to defend against. It was a shit show trying to remove the trade as the market swung wildly and I wasn’t able to get good fills as per usual during high volatility swings. Probably should have closed the trade earlier but overall it may end up being a wash having held over the weekend. We’ll see. Glad to end this type of trading for good. Not worth the 2-3% a month. Moving on to SPY/TLT, Momentum, Anchor.
Anchor has performed so nicely during this down trend. My account from the highs to the lows of yesterday is only down about about 1%. I do use a bit of timing in how I go long on the equities. If market breadth and bullish percentages are trending down I’ll sell ATM puts as a replacement for my equity. So at about 206 I sold all my ES/F and RSP that were my longs and sold an equal amount of weekly ATM spy puts with lots of premium. This obviously protected me in the last downtrend. My account should have been down closer to 2.5% from the highs to the lows (half of the 5% down). So yeah, the downtrend (208.5 to 197.6) has produced around a 1% loss in balance. Love it. Takes 15 min of trading and a little monitoring and that’s it. The strategy is a long equity based strategy so any uptick in the market will start producing profits again. Over time, protecting yourself from loss is the key to success. It equates to more efficient compounding.
The TLT/SPY pair trade is doing as expected but is currently down. I closed the TLT portion @ 0.19 and am left with the spy portion. I wasn’t able to roll the TLT in time and I am waiting a little to see if TLT will reverse. The chart below suggests it might be ready for reversal (hanging man candle stick, overbought RSI). Once it does, I’ll enter another spread to offset risk exposure in the spy portion.
==Update Market Open==
Since my opening post, the futures had fallen about 30 points and are now recovering. The high was 1994 and it had fallen to 1961.50 and currently sits around 1977.25. Another perfect open for us. Now we try and exit the trade.
I follow a few sources that I use when I have to make close call decisions on adjustments. The first is a market breadth indicator that I follow at www.sghammer.com and the other is cobrasmarketview. Right now the summation of all the info is suggesting a bit of a bounce right here. I am going to start scaling out of the trade.
== Update 9:05 am European Time ==
Futures are up about 0.4%. We’re entering the day a bit delta negative. We will be closing the trade throughout the day. We are looking at about a 5-6% return for the month. Not bad considering the SPX has fallen about 80 points in the past week. It helps offset the 9% loss I had last month.
We’re perfectly balanced on the anchor trade. An Anchor trade is where we buy the market (RSP), buy equal amount of ATM Spy Puts (insurance) a year out, then buy about 30% more insurance and sell an equal portion of weekly spy puts (30%) against this each and every week. When you sell insurance you get a premium which we call time decay. You get paid for the risk of selling insurance. We target enough premium each week to pay for the entire 130% of long insurance we purchased a year out. The idea is at the end of the year you have paid for the insurance and thus have had a relatively low risk way of having market exposure. The returns are quite astounding.
Refer to the ETFs hedged column. The results are even better as we’ve added new rules to how we sell the short puts that eliminate a lot of the whip saw you’d experience. We’ve bumped up 2011 performance and 2008 performance quite a bit.
Today will mark the day where I start to diversify away from being primarily focused on the MIC (modified Iron Condor) trade and more diversified into 5 different complementary trading strategies. I am looking to alleviate the time requirements of managing a heavy MIC trade. It’s something I am very looking forward to.
==Update Market Close ==
Another roller coaster day. During the open I just couldn’t get good prices for the spreads. It made sense, the market fell about 30 points and then recovered. We add a lot of adjustments and we’re heading into tomorrow. We’re slightly delta negative (we don’t like too much “up”) and we have an extreme amount of daily time decay. I’ll close tomorrow regardless. I can’t wait to get out of these large MIC trades. Getting tired of them. Looking forward to a nicely diversified lower maintenance portfolio.
==Update 9:36 Am EST==
What a perfect open. Looking at winding down the trade.
At close on Friday I bought a bit of VNR (vanguard natural resources) as it was trading below book value. It was good for about 1500 profit today.
It’s an hour before market open and the futures are acting perfectly for my trade. I’ll close today or latest tomorrow depending on the volatility collapse in the pricing as we edge near expiration. I’ll likely scale out through out the day but I don’t want to over pay to close the ‘way out of the money’ credit spreads. They expire Thursday and we’ve got room but at the same time, things are volatile and can turn on a dime. I’ll weigh the options at open (no pun intended)
Right now on SPX we have (SPX currently sitting at 2012)
1920/1940 Credit Spread
1930/1950 Credit Spread
On RUT we have (RUT currently sitting at 1157)
1055/1075 Credit Spread
1110/1090 Credit Spread
They should be able to be closed at a very good prices. I suspect I can end this trade at a very healthy return.
This marked the worst week of the year. The market fell ~4% or 70 SPX points right at the tail end of our trade. The silver lining is that it’s the best time cycle of the MIC to have been in. If it was the beginning or the middle, it’d be a lot worse. In fact, if things smooth over or if there is little downs we’ll likely end up with a much higher profit than possible before because of all the debit spreads (insurance) we bought on the way down. As long as the market doesn’t fall too much more in after hours as it already has, we’ll be A-OK.
Now on to Friday: Everything was good until about the last 20 minutes of trading. SPX was at about 2024 a very ideal and delta neutral area for us. I was very happy and looking forward to enjoying the rest of my night. All was good. All setup for the weekend. However, the market had other plans, It then proceeded to fall to about 2015 within 5 minutes. We started to prepare for an adjustment with 10-15 minutes left to go in trading. We got one through making us decently positioned @ 2015 with our next adjustment at 2000. However, in the last 2 minutes the market just collapsed and fell to 2003 and the VIX surged. 2003 is near but not quite our next adjustment point. I wanted to do another adjustment to get us right delta neutral before the weekend but the market fell so fast and within only a minute or two of close. In after hours trading the marketing fell another chunk to 1997 unfortunately, the market was closed and but we weren’t able to adjust. So within 20 minutes the market fell from 2024 to 1997. Not ideal. I am not hating our position as the next week is one of the most seasonal bullish weeks of the year but I don’t like going into a weekend being right at an adjustment point. It seems no matter how hard you plan to be risk averse, things can still bite you in the ass. The great thing is our theta is extremely high and should offset any movement.
==Market Open Update==
The market opened up kindly for us. We made some small adjustments on both the RUT and SPX MIC at a good price as both rose. We’re now delta neutral for both with a very large THETA (time decay) PER day heading into the final weekend. We’re looking good. RUT has no upside risk as we’ve removed the call spreads. SPX has very little upside risk (45 or so call spreads still on). We’ll be holding till Monday but at end of day today we’ll be adjusting so we enter at relatively delta neutral with a large window to alleviate as much risk as possible heading into Monday. Hopefully it’s a stress free final day of market risk for this month
Today (Friday) should be challenging. The futures are down 19 points. Yesterday opened at 2032 and within an hour hit 2055. That’s a large move up. Then it proceeded to fall all the way to 2031 by market close. A complete reversal (see white chart below). We’re looking to open around 2019. From yesterdays peak to trough that’s about 40 SPX points in a few trading hours. We’ve got an adjustment to do around the 2020 mark. We’ll add a full debit spread. If it opens much lower, we’ll buy back some puts on the credit spread. That’s the most aggressive adjustment. We’ll gauge on open. I don’t love doing this so close to the end of the trade but it’s necessary. The next adjustment point would be 2010. We should be able to get most profit out at about 2012-2040 range on Monday, Not an easy environment for the MIC especially so close to the expiration but it’s better than having opened one a week or two ago.
That was a first for me and I’ve seen a lot these past few years. The size of the swings and the timing is quite astounding.
Luckily the whipsaw did not affect our position directly since it was so close to the end and we had a huge range and we hadn’t needed to adjust. However, the volatility increase is making it annoying to close the trade. We’ll likely need to wait until Monday or Tuesday. As theta and vega start do deflate from the trade. We have that luxury with the trade being so delta neutral. Right now there is a lot of fear in the market and it reflects in the price of the insurance we sold despite it being very close to expiry and far away from the strikes. Friday and the weekend should deflate most of that value away. We’ll want to enter the weekend fairly delta neutral as a way to mitigate all potential risk.
I am excited to close up the year and reset my trading portfolio in January. It’ll be both a lot less active maintenance and a lot more diversification. This year was an active trading year as I was nearly 80% MIC and heavily focused on small active adjustments to avoid whipsaw. This backfired in the huge 250 point run we had from 1820 to 2070
Modified Iron condor (MIC)
The MIC is a non-directional strategy where you sell both ends of the spectrum and buy insurance in the middle. Essentially, you’re a market insurance salesmen. The upside is usually the biggest problem with the MIC and the anchor likes up, so they tend to hedge each other. The EV trading loves volatitlity increases and helps on the down as does the standard adjustments you’d do in the MIC. Down and up are generally covered.
This is how you’d setup an MIC
Setup:The shorts start at approximately delta 8-10 and are 20 wide. The call side
is uneven and typically one unit represents 5 on the call side and 15 on
the put side. To balance vega/delta further I add a close to ATM put
debit spread and 2 black swan puts. The call spreads are smaller because of volatility
skew and it makes it easier to manage on the upside.
Adjustments are made at 20-25 delta. Essentially you sold insurance on both sides for a significant amount and through the month you manage your delta (risk).
On the upside an adjustment would remove a portion of the call spreads
on the downside an adjustment would be to widen the debit spread, buy
more debit spreads OR buy a long put in a fast declining market
Sell to open 15 January 17 2014 1025 put
Buy to open 15 January 17 2014 1005 put
Price: $.90 credit
Sell to open 5 January 17 2014 1200 call
Buy to open 5 January 17 2014 1220 call
Price: $1.15 credit
Buy to open 1 January 17 2014 1125 putSell to open 1 Jaunary 17 2014 1105 put
Price: $6.65 debit
Buy to open 2 January 17 2014 920 put
Price: $.90 debit
RUT at 1128. This represents 1 unit.