Tag: john locke rock trade

Oct 7 – Trade Plan (Oct M3s and Protector)

I had to adjust the October M3s as RUT hit 1145/1146 area. Not something I wanted to see as the upside on these are weaker. I sold 1100/1080 credit spreads and rolled up some of the bottom longs. Of course, about 5 min later the market rolls over to 1138 but the adjustment is down about 1200-1500 right now. Not terrible and I had to do it this close to expiry. The delta and T+0 lines were not in a good place if the move should continue. One of the better technicians I follow expects the RUT to expire in October and around 1190. I take that only modestly into consideration but I do believe there is room for this to continue on. Any more significant up and we’ll have the same sorts of mechanics that we had in October of last year.

I am so happy to soon get out of this trade and move on to December and finalizing November.

One of the 24 equities (though more heavily weighted) I have in my protector portfolio is ALFA which is a great little ETF that follows filings of out-performing hedge funds. I did not realize it hedged itself by going market neutral when the market is below its 200DMA at end of month. Fuck. So I was hedging it since Oct 1 when it was already hedging itself. The ALFA holdings triggered the hedge on Oct 1st and since then has not been participated in the rally. This is one source of my correlation issues. I’m fixing it by replacing it with a normal equity but I will leave it as part of the portfolio since its self hedged. A due diligence error on my part. Though it may end up fine if the market rolls over or stalls around the 195 area.

Oct 6 (New Trade: M3 Rhino Variant)

I’ve put on a variant of the M3 which is started a bit farther out in DTE (usually 77 days till expiry). It’s the same concept as an M3 except it utilizes a broken wing butterfly instead of a call. The trade is a bit more rule based as well. I’ll be entering a normal M3 around 67 DTE and an M3 Rhino about 77 DTE and I’ll be closing them around 21 DTE to avoid gamma issues and to make trading much easier especially in a large account.

You can see the risk profile is almost identical to the original M3. The management is slightly different though. On the upside we use call calendars and call BFs and on the downside we simply roll the BFs back.

I’m expecting to have much more consistent results going forward with these further out DTE trades. They won’t be glamourous but they’ll be stable and consistent with lot less stress. I trade a big account and managing several theta based trades 7-10 DTE is challenging and I am tired of it.

Oh: Kudo’s to Brian Larson for creating this trade variant of the M3.

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Trade Plan (Oct M3 Trades)

The October trades got brutalized today. On Friday afternoon the RUT touched just below 1080 and now it’s closing Monday at 1142. That’s a 6% move in a single days worth of trading. The trade type cannot withstand that kind of movement this close to expiry. I adjusted in a flurry on Friday and at the end of the day the trades were OK. I was a bit uncomfortable with a fall in volatility and a rise the RUT but everything was in decent shape, the T+0 lines were relatively flat. Today it gapped open and didn’t stop. I did some moderate adjusting this AM but it wasn’t enough and the trades lost a lot of their profits with a big reduction in the volatility and an oversized moved to the upside. It is what it is. I’ll be looking at them tonight to see what we can do but likely I’ll start to peel them off and we’ll take whatever profits are there. The recovery from Aug 24 goes very slowly.

Trade Plan (Nov M3)

No adjustments today. The upside delta is getting a bit high but we’re not at an adjustment point yet but will be soon. We’ll likely add a few verticals and if it spends about 2-3 days outside the tent then we’ll roll up the BFs. We’ll be aiming to be out before 14 DTE and hopefully before 21 DTE. This is how the trades will be managed going forward. I won’t be trading too close to expiration.

This trade has survived a lot of movement and is still profitable.

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Oct 5 – Trade Update #2

I just read that Friday’s intraday move was the biggest in 4 years. Quite a short squeeze have going on. We’re now at RUT 1134 which is another 1.75% and marks a 5% move in 5 or so trading hours for the RUT. It really does hurt the October trades unfortunately. Moving up that much in 4-5 trading hours is just too much for the trade to handle while keeping its all time high profit numbers. It’s going to be positive but man, it does hurt a bit. I’ll be doing most of the adjusting at the planned 2pm time. Hopefully it comes down a bit. I did some adjusting but decided to wait until 2pm since its probably better to follow the plan off such a heated up move. I’ll be watching any retracement to start putting in place our upside adjustments.

Oct 5 – Trade Plan (General)

It’s been a very challenging 5 weeks. It started with the Aug 24 correction which was followed by weeks of big 5-10% moves in the RUT as we approached the ever important fed announcement. On Fed day, the RUT tags 1194 only to correct back down to 1078 (nearly 10%) in a matter of 5 trading days only to now bounce about 4% into Monday. Managing theta based market neutral trades through these kinds of moves is a test of patience and resilience.

On Friday, the RUT was down 1.7% and closed the day up about 1.4%. This AM it looks like it’ll open another 1% higher. That’s a 4% move to the upside in a matter of hours. Quite impressive. Likewise, the SPY futures tagged 1885 on Friday and is sitting at 1957 right now. That’s nearly 75 points in a handful of trading hours.

The extreme upside movement will give some problems to our October trades. My plan is to close a bunch of 1060 BFs and get my T+0 line as flat as I can to the upside and start closing down the trades throughout the week. The upside move is pretty extreme and quick but that’s usually the way. It was touching lows and now its going to blow past 1120. When it’s this close to expiration it can cause some issues on the upside with a sagging t+0 line as volatility floods out. I don’t like adjusting near the open, but I think I have to nip this in the bud and make sure we’re not exposed on the upside for any further run. The RUT is one of the lagging indices and probably has more room to run.

The November trades will likely have a bit of a sag in the right side of the T+0 line that we’ll need to fix. Nothing major.

Hopefully the Protector Alpha can start catching up again, it’s been underperforming the last month.

Oct 2 – October M3 Updates

Wow. So the market opens up and gets to about -1.7% then proceeds to close at about +1.4%. This is why you wait till 2pm to adjust 🙂 At 2pm, most of our deltas were just fine. The market was hovering around 1093 and all is good. We were at ATHs for each of the trades. The market then starts screaming around 3:15pm up to 1113. This huge rise so close to DTE puts pressure on our upside deltas and as volatility is falling out of the trades, our T+0 line starts sagging on the right side of the graph. I had to make a flurry of adjustments to get the deltas in line and to protect from a potential gap up on Monday. The Trades are still at all time highs for the P/L but they’re a bit vulnerable to a big up move on Monday.

A high value day

Days like today happen every so often especially when we’re about 12-17 days from expiry, all of your time decay based strategies suddenly increase in value. I notice that most of the ‘time decay’ you get closer to expiry happens in spurts and does not occur consistently day to day. Days like this are sometimes called a high value day amongst theta based traders. Every month I find myself pointing it out to my wife and showing her the increases in P/L across he board on one single day. I try to explain it as market makers having to start getting rid of the time value in the options once we start approaching expiration day. I gather its when they think its more of a ‘risk on’ environment than risk off. Perhaps this means that the next week or so will be positive or at least less volatile? This happened with my MICs and now today I saw it happening with my M3 and BB trades. I’d be chugging along at a pretty static P/L and then in one day, all of a sudden, it’s worth a lot more. Anyways, interesting.

All of the Oct trades are up a good amount of money and its probably time to start winding them down and getting in Nov and Dec M3s.