Oct 15 2018 – Update on Trades

All in all, this was a perfect little mini-crash tester for my systems and risk parameters. My systems and parameters (trade plan) were drastically revised after the Feb event (which was an absolute earthquake shake up in how I handle risk). That event let me see how everything reacts both re BS protection and how the system reacts to the portfolio of trades. The really important part is the nuance of removing trades while staying within margin parameters. The hedges have to get taken off quickly but that means you have to take off some income trades. These income trades are sometimes riddled with so much juice that it is hard psychologically to remove them. The thing is, you’re now closer to your tent, any stabilization and you could be at 2-3x your profit target in the first place. So re human factors, what do you do if your hedge didn’t fully protect your income (under sized or it just didn’t trigger, or you waited too long to remove) and you’re down 5-10%. Do you just take the loss and close the hedge and income trade with no hope of getting back? Do you close it all down and open new ones? All these things have to be part of a trading plan. Accounting for how to deal with yourself and your portfolio during an event is crucial.

I am convinced the experience I gained having traded through the markets of Sep/Oct 2014, Aug 2015, Jan 2016, Feb 2018 and now Oct 2018, gave me an incredible wealth of insight into how to manage events and event risk. I feel that I am reaching a stage of trading where my focus is solely on risk management much before maximizing returns. That’s a big big step for me, I am naturally a risk taker, and I go big. To be so focused on the opposite part and it now being natural is a massive step for me. It’s served me very well in life re taking risks and making them work but with the nuance that I usually have 3 back ups and really understand the risks/odds I don’t sleep until I make sure it works! In trading, I found that I sometimes didn’t initially understand fully the risks and I couldn’t just make it work. So this slaps you in the face and requires you learn to be pro-active in risk management. And here we are. This was and is the hardest thing I’ve done in life. I think that road (the learning of how to manage risk) is now coming to an end, I think I’m arriving to the point where I should be re trading. Risk in trading is not easy especially if you’re doing amounts that make a difference to your life. Taking large losses during an event and/or waiting for the vol to come out can take months and these months can affect your life if you’re trading large. I can tell you that it sucks waking up at 3am to check futures. It’s just not worth it. Pre-plan and take care of your risks. As I said, I am a risk taker, always have been and I’ve done it successfully in all areas of my life. I mean I was a professional gambler at the start (7 years!), made tons, parlayed that into a business (all of my cash..which is absolutely insane if you think about it) I could have retired off what I made but instead, I bet it all on a business. Took that risk. But. When I choose to take a big risk, I do everything I possibly can to make it succeed. That’s the key (but it doesn’t work with trading unless you’re thinking long term development as a trader). What I mean, is if you have an event, and you’ve taken loss, you just can’t do anything there can you? But you can do all you can to work on your trading plan and yourself to make sure it doesn’t happen again. I don’t sleep at night if it requires attention. You just make it work. I’ve seen so many people start businesses, then just fuck off and give up on it. It’s like they end up with a resentment to it, a resentment to their failed expectations. That resentment seems to push them away from success and allows them to accept the failure. They’ve tricked themselves into hating their business or whatever it is which allows them to just close it up.

This Feb event gave the tools and foresight to strengthen my trade plan in this search for what I hope ends up being an almost riskless very conservative way to obtain 30-40% returns per year. The Oct mini-event, allowed a partial test of the new systems and allowed me to refine a few things. The goal used to be to trade very intricate complex structures and trade it full time and aim for 75-100% returns on capital but as my size grows and as my risk appetite lessons, and as my focus to risk management changes, I’ve realized that I probably will max out in the 30-40% range for OTM structures. I do believe the best ATM traders (John Locke, Kevin Lee) can do the 70-100% returns but it all depends on what capital they’re using. If you’re allocating 100k out of 2MM to a trade, then sure, you can probably accept specific risk parameters that allow you to obtain those out-sized returns, but if you’re allocating the entire 2MM then you have to dial it down.

What’s changed this time around?

1. I am going to allocate 50% of what I normally allocate re trading capital. I am so PISSED that I didn’t have more dry powder on Thursday. The shit is like 4x more juicy to enter. I am convinced if you waited for a 90% MDD day to enter these types of trades, you’d make the same amount as if you entered every month. These 90% MDD days happen 3.5x a year on average for the last 50 years.

2. I am going to have a trifecta of hedges (that’s right, 3). I will use an LP campaign, a Hedge BSH, an income BSH and KH for margin control.

3. I will be utilizing some bearish ATM structures as a partial hedge and separate income trade that covers that first 5%-7% down move in the markets.

4. I will utilize bearish STT during bounces after a crash event as well as index dynamic hedging.

5. Maybe stay away from futures and futures brokers 🙂

6. I don’t think I’ll trade HS3 unless its opportunistic and on large MDD type days. I don’t love its unpredictable complexity. I feel an STT so intimately.

Whoa, what a day.

Huh, what a day.

Maybe we’ll now have 3 sets of backtesting dates we can use for correction analyzing lol 🙂 Spicy 3.5% down on the market day while Futures are sitting at 2778 (nearly 4% down) post market day.

The day started off well. I was able to close a load of HS3 out for close to profit target (I removed around 150 SPX equivalent units throughout the day). That was nice. Rare that on days like these I hit target..nice for a change. That was for December HS3 though. Nice and matured and liked the down move. However, I did end up at 2810 with too many previous ATM PCS adjustments relative to the size of what I had left of HS3 original structures and the market puked so quick I didn’t get them off. A bit annoying because it drew down a bit at end of day.

However, not all that rosey, the VIX spike to 23 and the skew changes have hurt my newest existing CC and HS3 trades as well as the start of my BSH factory. Not insane down but a bit spicy. As well, I wasn’t able to get all my Dec HS3 trades off and I have some with too many ATM PCS that I didn’t close. Probably 5-10 units left here but positive delta exposure (though limited because the ATM PCS are only 25 wide and are already half the value). No matter how you slice it we sell Vol and when we have a move like this (they say its top 3 point move in history) we’ll feel some pain in the volatility increase.

My current main exposure is this:

67 Jan HS3 (+30k)
75 Mar HS3 (-65k)
65 Mar CC (-52k)
Oct HS3 Hedge (+30k) (converted today early on)

BSH factory start (-35k to -40k or so) (this is probably temporary..the puts are around 2050 and 1975 so I am not overly worried, it’ll just take time). I nearly took them off when the force index hit 15 but it wasn’t really part of my plan so I didn’t. I obviously wish I did.

I kinda expect the market to slow down here and bounce, it’s hitting the trend line from the Feb lows and the RSI is very oversold. Probably a bit more pain (capitulation) as we visit and test the 200 SMA in the AM which sits at 2769 area (approaching now in afterhours) and a bounce/relief. That said, the RUT broke its 200 day today quite a bit…maybe SPX follows. I’d say that a bounce is better odds than another 90% MDD day but who knows. My gut wasn’t too worried @ 2pm today but this after hours action is kinda worrisome. Should be an interesting few days.

I am not overly exposed and the pain is relatively small. The HS3 March could experience a vomma surge to help its profit if we crash more but likely it’ll be drawn down until we have vol relief. It’s generally BSH protected but none of that activates unless its really swift and large in magnitude.. Yesterday it was about break-even and today its down 65k on a 110 point move. The CC’s were down about 30k yesterday (all expected) and today was hovering around 50k and with this afterhours movement I bet it is touching 60k. Anymore and I’ll have to do something.

I turned my Dec/Jan CC’s more neutral well before this move and they’re all relatively ok. Barely flinched from yesterday, though drawn down from the start of 8 days ago due to vega over the past week.

I rolled my rhino yesterday which was great. It’s just drawn down a bit but positioned well.

I have KH on that are now up a bit today…not quite activated yet.

Oct 4 – Nice! A 1.35% down day!

Finally got some volatility.

I put on the following today:

125 ES Units of HS3 (Futures)
10 units of CC (BWBSTT) in SPX
20 ES units of CC (BWBSTT) in ES
105 ES short puts for the BSH factory
10 units of Rhino Dec
100 ES PCS ATM for Dec/Jan HS3s
Some KH in my SPX account

Yesterday and late last week

5 units of X4V14
Rolled up my CC longs for January by 100 points (nice timing!)
Throughout last few days I got on 20 units of BWBSTT in SPX

All of my Jan and Dec STT campaigns are fairly neutralized as I’ve harvested the lower part of the risk profile. Kinda love that. They still have loads of theta but downside risk is much more contained. I basically only have March STTs that have BS risk but I’ve got hedges for that.

In my ES account, I still have about 200 old HS3 units from Dec/Jan that are about 70% of profit target. I just sold some ATM PCS at today’s bottom to raise the UEl and get them less negative delta. Will be closing Dec very soon.

I added 125 ES units in March expoiration(67.5 SPX equiv) and I consider it an opportunistic trade as well as added some ES CC (STTBWB) and started the short selling for the factory. I have a factory started both in the ES and SPX.

Busy day today, the type of day where you work for your money.

Had some minor vol related draw downs but no big deal, temporary and extremely small. The X4 I put on yesterday was poor timing 🙂 That thing is down about 3k. It’s funny, I can predict what my balance would be during a 1.35% down-day almost exactly as well as the rise in balance when we have a end of day relief rally (like now).

I do have about 105 shorts exposed on my BSH factory that was borderline ready to form yesterday (wish I had) but those Dec puts will be a magnet down in value if we get any bounce and as a week or so goes by. Once they are formed, I’ll have about 100 units of BSH formed for profit.

Oct 1 – BSH Factory, CC (BWB-STT) campaign and poker

On Wednesday I just finished up a mastermind presentation in the PMTT group that talked about how to deal with your trade portfolio in a crash, the BSH factory campaign and how to harvest the STT-BWB. It went well, lasted about 1.5 hours and had 155 slides. It’s hard to talk about all this stuff on the blog as the info is protected in the group. It’s kinda what probably makes this blog stagnate at times. I have to get creative while not divulging our IP. If it was up to me, I’d share a lot more but it’s unfair to the group.

I did have some back of mind reservations presenting this campaign as I thought it was the “nuts” and I worried about having tons of people selling the same strikes on the same opportunistic days, but I dunno, I don’t ever want to be that guy, I don’t need to resort to that in life and my integrity is worth more than whatever perceived value there is. My belief is the group works because we all generally share our good ideas and in return we get tons of smart “eyes” looking at it and making it better. It works and this is what makes it tick and I’m going to continue on this path. Besides, the value back has been incredible and I am glad that we’re all exploring furthering the campaign in both its theory and its practical implementation. Returns in spades.

On Friday, I had 12 units of Rhino waiting to fill and it did right at the end of day at a good price @ 2.75 for the Dec 1710/1670/1620 BWB. Nice. I just closed off my other 10 units that I put on in July for 21k in profit. I still dabble in the ATM trades for diversification. Though, I hate taking this shit off sometimes. I had a host of Call calendars, Call BWBs and put BWBs and taking one part off leaves the other side exposed and sometimes fills just suck. It took me 2 hours to close it and I was cursing the entire time.

On the opposite spectrum, the STT CC campaign is much easier to manage and I usually just convert the structure to a hedge structure late in the trade. Saves commissions and adds some insurance. The STT CC is my bulk trade right now coupled with the BSH factory which will be for both income and hedging. Pretty much all I do now is some Rhinos (super low % of account), CC campaign, BSH factory and opportunistic HS3. I also dabble in some mechanical equity investing but its just for utilizing some of my balance (for further info check out the motley fool mechanical investing forum (search TMF mechanical investing) or check out imarketsignals.com. It’s cool stuff. The community in mechanical investing have been doing it for 20+ years.

Poker

I’ve been studying every day ramping up for the Oct WPT in Montreal. This is going to be practice run at the PSPC in January. I have about 40 hours of study left I suppose just to get me on par level in knowledge with the average competition. Not an easy game as I’ve been at this since 1999 ;). When I was in my twenties, I mean, I felt like my generation was easy competition, I’d put in reasonable efforts and excel in whatever it may have been..ie. Poker at the time was jokes, first person shooters on PC was jokes or whatever. Now, I put in probably 800 hours into PubG and still suck, back in the day my wife and I played Rainbow 6 lockdown/vegas and were top 100. Now, I doubt I break top 100k 🙂 I don’t know, it feels like everything is taken next level (or ten) by this new generation. The kids in poker now have just perfected everything. They literally eat, breathe, shit poker. It’s all they do and they do it right. They’ve broken down the game to levels that are so far beyond. If they put that effort into anything else (trading, business start ups etc) they’d probably have easier success though. I’d gather that to be earning reasonable money in tournament poker would take the same effort it takes to be be a professional trader but with less variance.

All that said, After Oct, I might hire the best tournament coach in the world to get me prepped. The prob is he’s like 375 EUR an hour 🙂 Steep, but thats what you get for the best. I might start with a more reasonable one and get ramped up towards him. BencB is the coachs name. Epic track record.

Whirlwind month of Jul (Travels, HS3, STT, Rhino etc)

Finally settling down and getting back to normal work lifestyle rather than scurried catch-up.

Just finished a 24 day cruise, then traveled to Arona, Italy for some R&R with family friends then onwards to meet my biggest client (a well known Ferrari racer/entrepreneur socialite type guy who’s got the fastest lifestyle I’ve ever seen) in Budapest which consisted of me trying to balance 2 kids, a baby, an “at the end of her rope” wife while staying out to 3:30am for business (and some pleasure). I barely could keep up with anything. After that I made my way by rental van to Zadar, Croatia where I caught up. We just left and made it to Istria, Croatia and now I am in a villa in the countryside relaxing and catching up on everything.

During these little whirlwind periods, I have to balance everything which can be difficult but I think I have it down to a science. My communication usually suffers, emails that aren’t super important sometimes get forgotten but everything else is generally aces. One of the reasons I travel to Europe during the summer instead of elsewhere is because of the timezone, i.e. the market opens at 330pm here so I get the evenings to attend to trading.

My mind is always focused on the trades during every single day regardless of where I am, or what tours I might be on or if we’re on the road. I generally don’t miss a beat on the management of these trades and finding opportunities for entry and adjustment.

I usually wake up every day, model my trades, look at the market technicals, figure out what I need to do later, enter trades in IB/EDF and pause them for market open. I then get out for the day with the family and do whatever we may have planned. We have a small baby now so we have to usually be back for 12-1pm for nap time. I use that to further catch up and usually do some backtesting or whatever else I have to do for market open. Then at about 2:30-3pm my wife and I will typically head out for some alone time for about 3 hrs, usually touring cities and getting dinner and a drink. During this time, I got everything on my phone and sometimes I may have to interrupt the conversation to get things on but its never a prob. We are usually back by 7pm where I finish out the rest of the market hours and I’m done by 9:30pm to finish the night. Through all that, I am usually tapped out and non important things get left to the way side until I get to an area where I can relax more and catch-up. So yah, If I am out, and I usually am, I’ll be looking at phone and entering those BWBs (for new trades), PCS (for raising UELs in HS3s etc), and entering them in-between talking to my kids at dinner or wherever else I am. I am using downtime during the day (naps or AM) to model and get a plan in place.

The HS3 futures in EDF are crushing right now, I started them I think in May and it’s up almost 35% or so. I reached profit target on 111 units in Oct 31 expiration and 20 units in Sep expiration. I have another 83 (SPX equiv) units on in Dec monthly which are more than half way to target and 61 (SPX equiv) in Dec 31 expiration that I just started on those two down days we had last 8 days or so 🙂

My HS3s in SPX/IB are also near profit target. Wonderful. I think I have on about 100 units there. Solid gains. My CC campaign is also doing great.

I added in some Rhino and X14V14s in for ATM trades. I changed how I manage upside in the Rhino but the main reason I added is I call it a middler which loves moderate down moves and helps hedge that little area where the market falls 2-5% and affects (short term) the HS3s and CC trades negatively re vol and skew effects. I love how it reacts together. I really liked the rhino in the old days as I remember being super upset about making 20% when the market moved up 50% over 2016 🙂 I will use it small as a booster and middler 😉

I am not sure where we will go next (we’re here in Croatia until the 11th but for sure I will be in Barcelona for the Pokerstars tournament on the 22nd where hopefully I can have some decent luck..

More to come as I have lots of time…

Jun 29 – Trade update

Super unexpectedly, I got a slew of emails from my new futures broker wanting me to send more $ to cover their risk models. They suddenly realised my risk at -10% slice was high (on their models). I gather that the vol expansion the last few days had all the risk guys looking into accounts and they tumbled on to mine. The Eroom guys are introducers and they were the ones that seemed panicked about the risk profile. On a true crash, the HS3 would likely do very well but most models don’t correctly show that. I was on a sea day (on the way from Copenhagen to Estonia) and obviously couldn’t easily arrange for said wire.

After what was about 25 emails between several people, I was able to transfer from my SPX account at APEX to my futures account at EDF. IF this is how they act on a normal day how will they act on a true crash? I can’t deal with the emotions and demands of several people during a day like that so I am not sure I can expand much with the futures account.

That’s all good though, we’ve developed a few new trade types that have exact risk profiles and backtests (automated 1000s of them thanks to a genius quant in our group) that can be done with ease in SPX and IB. I’ve already moved most of the newest stuff to that methodology anyways.

I’m glad its Friday and the market is up pre. I can go enjoy Estonia and have the weekend in Russia. Yesterday would have been a terrible day to be at port re dealing with brokers.

Jun 27 – Trade Plan (STT, HS3 and X4V14)

Today was a typical bounce day and I used the opportunity to get in some bearish STT and PDS hedges.

I’d like to backtest the krishnan hedge as a vol spike hedge and probably will do so on the cruise during the vast amounts of free time I’ll have 🙂 Generally, I get a lot of sitting around time and I’ll typically choose something to research or test.

I’ve got on a slew of protected STT, HS3 and X4V14 trades (ATM BWBs). All reacted fine during the little fall and all are pretty well hedged. Not a whole lot to report really. I added some delta and vega hedges on the bounce just to balance out everything.

This trade war rhetoric should keep skews pretty disadvantageous to already on trades. Reasonable to put on new trades etc.

Jun 26 – Yesterdays Vol Shock and the trades

Yesterday was interesting day, VIX spiked up 40-45% and we had some relative fear in the market.

My fresh HS3 trades all drew down as expected on any initial vol spike of that magnitude. Nothing at all to be concerned about and not all that big. My older HS3s were just fine. After an initial spike (VIX spiked to 19) there’s not all that much relative exposure to Vega left before the BS portions of the trade kick in. I mean there is a bit but relatively small and any more down move would trigger the OTM longs and the trade goes profitable. The trade is almost as perfect as it can get but what it needs is some initial vol spike hedging to keep Drawdowns and psychology clean. We have initial ideas.

The draw down is due to Vega and Vanna as the initial vol spike doesn’t quite affect the far away longs as much as the more upfront part of the trade. The far away longs would trigger in a bigger move down or a continued move down. Works well. The draw downs from an initial shock are moderate but I don’t lose sleep on it, standard (pre-market now, we’re already recovered most of the draw down). Basically, just stating that a 40% initial vol spike will generally cause your HS3s to draw down $500 or more.

Another 3% drop would activate those longs and BS protection kicks in and the trades would crush. This is the nature of the trade and the trade-off of the structure and well, it’s expected with ANY positive theta trade, at least initially. Rui mentions that he noticed in his backtest that the lower long put Vomma, Vanna, and Gamma power kicks in when the SPX gets close to the upper longs and the lower get into the 10 delta range.

Essentially, an initial shock and the time before panic is the temporary dead zone of these trades. Once those lowers have the greeks activated, then the trade profits.

Let’s call it VolFEAR and VolPANIC to distinguish the two types. An STT combo and an HS3 combo will initially draw down when we are in-between VOlFEAR stage and the VolPANIC stage and this is usually a relatively temporary period before either the market moves towards VolPanic or VolNORMAL stages.

Adding in a Krishnan PBR might be the answer to this and I am going to explore adding it in for low vol times for that initial shock (that you’d typically get in a 1.5-2.5% down day). This would cover the initial DD and maybe even profit and taken off while the initial structure would activate on a move further and is safe anyways.

The market is bouncing now and my pre-market balance is relative recovered. In backtesting, this was always the case and often after a larger fall and a few days of rest, the trades hit the profit tent and reach targets. Let’s see if this is the case for my older trades.

I managed to get on about 40 more units yesterday and I got 25 PDS @ 45 DTE to help with hedging on the bounce to 2721 at EOD.

I Like where we are right now.

Big accounts and prepping for travels (HS3 and STT trades)

I am about to board a 24 day cruise and am preparing all of my trades.

I have this on right now:

250 units of HS3 (spread between ES @ EDF and SPX @ IB) (2.5MM planned capital)
20 units of Campaign style STT (1.5MM planned capital)
34 units of X4V14 (Locke style ATM BWB) – (765k Planned capital)
50 units of KH hedge (Black swan lottos)

So that’s quite a bit!

To prepare I have 2 sim cards (local EU with roaming and a CAD world wide roaming) as a reserve. I have unlimited internet on the cruise and I brought a portable monitor and laptop. I’ve entered GTC orders for every HS3 and STT so that they’re there for me. I’ve got all my models ready and none of these are particularly exposed to a BSH as they’ve all got BSH built in. Most of the work is entering, and I am fully entered. I’ve got the GTCs so I can close in crisis (hopefully at profit). The market opens here at 3:30pm-4:30pm depending where you are, so I am usually done my tours etc by then so I can attend to trades in the evening or early afternoon.

I’ve done this before and guess what, it was during Aug 24 2015 crash 🙂 Suffice to say I was tied to the computer for the last 4 days of that cruise. The internet handles IB with ease. Haven’t had an issue. It was different them, I was trading rhinos and Modified Condors. I needed to adjust.

Lately, skew and vol has increased due to trade war rhetoric and i’ve noticed my Decembers take a vol hit. Not a big deal but could have had better entries.

Jun 23 – In Europe and trading update (HS3/STT)

I just arrived in Europe on the 12th (Hamburg) and made my way to Copenhagen to board a 24 day northern Europe cruise on the 27th. We’re here in Europe till the 31st of Aug and will probably hit up Poland, Southern Germany and Italy again.

There’s been a lot of trade evolution in the PMTT group. We’re moving at an exponential pace in simplification of the HS3 and STT trades via almost synthetically identical structures into a much more manageable and executable way. We’ve also added in methodology for campaign style execution which is relevant for me re size. The new evolution of the STT now includes built in BSH which is necessary while the new HS3 is now executable with ease in SPX. All in all, I think they’ll totally replace the originals. We’re solving for drawdowns, margin issues, risk, and increasing potential returns but first and foremost the key thing everyone seems focused on is how these things will react in a crash and exactly how can we minimise the stress of reacting in that type of environment. Crashes are emotional events and we need trades that react positively and don’t require high stress adjustments.

The last crash had challenged certain assumptions and I think has led to a solving of hopefully every potential issue that could come up with margin, margin expansion, broker calculations of said margin and draw downs. I Learned a lot. It’s changed my goal and mindset. I think it has for other people in the group as well. We’re now naturally and entirely focused on risk managements, draw downs, and ease of execution and management during crashes. The one question I always ask myself w/ a trade is how would this react in a crash, how can I neutralise the risk or lock in profits during said crash and what is the likelihood I’d need to react in such a way that would be stressful or against the market. I want to be happy and relieved during a crash and not stressed. The situation I found myself in Feb — can’t happen again

I feel like the last year or two has been a grand experiment in creating a complex option position that sucks premium out of the market in a fairly riskless way thats both scalable and profitable while maintaining all of the secondary requirements of margin, margin expansion, broker calculations etc. We’re in one of the toughest most complex games in the world and it’s no surprise perhaps that it’s taken this long to develop something. It is what it is. It’s a journey.

The recovery since Feb has been nothing short of breathless which is nice.

I’ve got about 180 units of HS3 @ EDF&man, 100 units of SPX HS3, 20 units of campaign style STT, 30 or so units of X4V14, 20 units or so of the new style STT. Ready to rock.