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.

Screen Shot 2015-05-06 at 2.58.33 PM

 

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.

 

 

 

Apr 30 -Trade Plan

The weeks been volatile. Luckily, the way I trade now, I barely have to be present and I barely have any stress. I have alerts setup and I take care of them. However, that said, when I enter the trades for the following month, I tend to have to be more present with monitoring the markets especially during big down days as I use that as an opportunity to get paid more on the insurance I sell. It’s funny, I now love big down days, because I salivate at the increases in credit for the MIC legs I sell.  I rub my hands together, get excited, and start putting in orders.

I’ve got about 30 units in for the June trade via both RUT and SPX. I got some good entry points.  Once I close off the rest of May, I’ll probably add another 10 units max. Now, the easy part, set alerts, wait for ’em and adjust.  Every morning I do review all the updated greeks on each trade and make sure the alert points are set.

Note: The SPX options are now open a few hours earlier which is kinda neat. I forgot about this and was pleasantly surprised to see some GTC orders close pre-market. Gives some flexibility in the trade during big pre-market moves. I like it.

I haven’t been too close to adjustment on any side (both for the May and June trades) yet so things are fine.  I have “here and there” sold some call and put spreads on extremes but nothing really relevant. I’ve been peeling off portions of the May trade via GTC orders. The trade should do 6% (maybe 7%) overall depending on how the markets are until Monday.

I’ve reduced my protector portfolio by about 20% when it hit the highs around SPY@212. I feel more comfortable with the MIC trades in these types of market conditions. I feel and understand MIC trading dynamics so well now.

We’ve solidified plans for our move back to Cayman, the kids got into a school sorta by a favor (unexpectedly) and we’re going to be back by at least September. We have no idea if we’ll go back earlier or later. We might drive the Tesla down to UK to try and sell it (which equals extended road trip). Maybe extended 3 month road trip? I don’t know 100% yet. Someone is interested in it here, called excitedly as he was boarding a plane and is comign back on the 8th so it might sell then. We’ll see.  Can’t plan anything because of the unknown variables of the everything

 

 

 

 

 

Apr 23 – Trade Plan

The May MIC is now up 5.6% and we’re going to start looking at peeling some off. We’ll likely get it up to 7% by next Friday.  We’ve got a ton of room on each side, so we’re sitting pretty. It’s been a solid month. Happy with the results. Had some adjustments throughout but still managed to eek out the higher end in terms of return.

I entered 3 units of June yesterday with some of the up and downs

1140/1120 put spreads

1330/1350 call spreads

Not much else to report.

 

Apr 20 -Trade review

Today we had a nice little bounce in the markets, I used the opportunity to rebalance the alpha portion and size down about 7 percent overall.  I didn’t like the size of the alpha protector as compared to the MIC in terms of margin.

The MICs are doing great.  I’ll check tomorrow but it appears we are up at least 5-6% with a possibility of getting 7-9% when we close.  They are all well balanced and only a very large move will unhinge them.  We will close by next Friday or the following Monday at the very latest.  I will also enter June MICs slowly during the next 9 days and will try to enter them on a big down day to take advantage of the higher volatility.

Looking at Protector Alpha

Today I spent sometime looking into the composition of the equities in my protector alpha portfolio.

I’ve got about 5-6 different lists of equities based on mechanical/quantitative investing.  I am going to trim this down to the highest performers to simplify and strengthen the portfolio in general. Some of the 5-6 are definitely under performers both in back-testing and in live trading and we’ll be doing a trim of these.

The top two performing with the strongest backtest is the Best 8 of the Minimum-Volatility sectors of the S&P and the Best 12 of the USMV (MCSI USA minimum volatility ETF). Both of these strategies originated from George Vrba at ImarketSignals.

The Best 8 universe is generally Health Care, Consumer Staples and utilities and represents anywhere from 111 to 119 stocks. Weekly, we take the top 8 of these based on certain indicators.

The backtests:

Since 2000: 10,760% vs 87.55% SPY

Last 5 Years: 369% vs 92.9 SPY

Last 2 Years:  99% vs 34.44 SPY

Last 1 year: 40.4% vs 13.91% SPY

Last 6 months: 22.5% vs 12% SPY

Last 1 month: 2.86% vs 0.14% SPY

The USMV Best 12 universe is 155 stocks and represents the lower volatility sectors of US equities. We take the top 12 of these based on certain indicators.

 

The results since inception (real money)

26.4% vs SPY 8.35%

Screen Shot 2015-04-20 at 11.03.43 AM

The backtest for the S&P Min Volatility Best 8 is more extensive than the USMV but the results should be similar as they’re based on the same concepts and that is to benefit off of the reduced volatility of the selections and seek to benefit from low-volatility anomaly (that portfolios of low-volatility stocks have produced higher risk-adjusted returns than portfolios with high-volatility stocks). Further to this, taking the best 10-15% of that list takes that concept even further.  When we’re completely hedged with SPY as a baseline, our results on the protector vs just holding SPY should be quite pronounced.

Currently, we use about 6 of these types of mechanical picks for our equities but the majority are not quite as attractive. We had some cloning, some small cap picks and other but we may just move to using a combination of ALFA ticker, Best 8 and Best 12.

 

 

Apr 15 – Trade Plan

I was analyzing and calculating results this morning and chatted with a few people about the journey and the results to date and really just about trading and emotion.  I found that through my introduction to option trading till where I was now, the biggest battle I had was with myself. I bet people here that a lot in this world but to it’s important to really break down what that means.

Caveat: The below is more in the context of managing a month long trade and not anything to do with technical trading or the like. It’s about deviating from a plan and using discretion and “outside the plan” decision making.

Trading does really attract some smart people. Smart people like to gather and collate as much information as possible in the activity they’re engaged in.  Trading and investing is quite unique in that obtaining as much data or more than the next guy won’t necessarily generate a winning trade. It may give you slightly better odds, but the market moves in such a way as to not be highly predictable. Of course, you might have slightly higher odds but we all tend to over estimate the value of our information sources and end up surprised when things turn against us.  In almost anything else you put your mind to, having as much information and being able to process and collate it will usually result in getting better and better at the activity. Usually more information significantly increases your success rate, but in trading it really doesn’t (in this context).  There is so much information sources/types out there that people will usually have a tendency to over-educate themselves and to gather and review a lot of complicated information be it macro economical or technical or what have you and they try to collate the data into some useable decision.  A lot of times, these decisions end up being wrong and there-in comes emotion. Nobody wants to make a discretionary decision outside of their system and have it be wrong.  The normal tendency is to try and win it back or to make it right or it might just generate a lot of stress and burn-out. I can say that I’ve never tried to make it right or win it back but I have generated a shit-ton of stress. Stress that wouldn’t exist if I followed a pre-determined plan.  You end up looking and “hoping” that the market moves in the way of your discretionary decision. MOST importantly, people will look for information solely to justify the behaviour or action. Let me tell you, in trading, you’ll easily find suitable information to justify ANY action you want to take. That is a dangerous thing.

Discretionary adjustments bring about stress and emotion and those two things can lead to significant mistakes and over emphasis and over valuing  information to justify further mistakes. That’s what it boils down to.

You avoid this by creating a plan, following it religiously and by having proper alerts setup to avoid looking at the market on a continuous basis.

My results for the MIC since May are:

May: 5.69%

Jun: -2.65%

Jul: 1.01%

Aug: 7.24%

Sep: 4.8%

Oct: 0.78%

Nov: -9.7%

Dec: 2.01%

Mar: 3.96%

Apr (still in): 4%

Average without Nov: 2.99%

In the November trade I had made some discretionary but probably significantly POSEV adjustments that cost me a large month and several lost nights of sleep and un-needed stress.  Had I managed the trade according to plan, I’d actually have gotten out with a profit. Why was I trying to beat the trade?  Well, I thought I had collated enough information to justify deviating from the plan. I mean, seriously, I still believe it was hugely POSEV but, hey, both times I thought that and went against proper risk management, I’ve gotten burned bad!  It doesn’t matter if it was POSEV it was just too large a risk to take! What did I do? Well, instead of removing call spreads as my delta increased, I rolled them forward and increased the units. Why? Well, I had calculated the odds of the market going from 1820 to 2080 (as actually happened!) as quite negligible, especially in the small time frame of the trade usually after a fast down like that there is another down leg (opposite of a bounce). Every indicator was flashing insane over-bought. The position I took gave me a huge up range (apparently not enough).  I found probably 30 sources of information that would have attested to 2080 being <1% chance. It was unheard of, I think the market moved like 200 points in a matter of 7-9 trading days. Suffice to say,  the market kept going and went hard up. I had rolled/added around 130 points in at a point where it should have taken a breather.  That brought my largest loss and an un-needed one and it was because I deviated from a plan and tried to act on information as if it was a sure thing. Information will give you some odds but it won’t be enough to justify going outside of your risk plan. What was the other one? Well, that was when I first started trading and is too embarrassing to even mention (had to do with AAPL credit spreads and the infamous Andy Zaky)

You notice how after Dec I took two months off? Why? That was stress about the way November went.