modidor – Travels and Trades

May 6 2019 – Trade review (STT+BSH)

Nice little vol pop there. When I saw the tweet yesterday I knew to expect a very rocky futures open and when it got to about -2% I almost thought we could have a repeat of Aug 24 with a -5% open only because of the swiftness of the fall and the potential reaction when Europe opened. Alas, we swiftly found footing and the market rebounded and sits currently at 2920.

Funny enough, I had a portfolio on for my base via AllocateSmartly but didn’t love my entries and sold all of it Friday along with all my other longs. Good timing 🙂 I also harvested all my older STT and BSH last week and removed a ton of risk. I mean I have 600 net long puts in May 31 expiration and my Aug/Sep STTs were harvested. I wasn’t breaking a sweat last night even if we did open 5% down. Even today, I am neutral delta without a single adjustment.

Today, I am using the bounce and increased volatility to add some bearish toned STT. The bounce gives me better delta and the increased vol allows me to have a longer upside runway. Pretty much all I’ll be doing today.

My newest Oct STTs are taking a bit of heat, down about 300 a shot x 40. They were quite positive upper expiration line and roughly +50 delta but I have -delta older ones and I am adding some bearish toned ones now. Within a week or two they’ll be positive if all things remain equal. As time goes on, the trades get more and more -ve delta.

I gather I’ll get the account up to about 20% for end of June for the year. Which is roughly the target. I am hoping for 25% but we’ll see how this plays out. If we have more downside, then I gather I can get even more as we enter the tents of matured trades but if we runaway upwards, it’ll just be the standard lower profit. My goal is to consistently hit a yearly 50% with STT+BSH on total account value w/ compounding and opportunistic over-leveraging on significant down moves up to 1.2x. I won’t be deviating strategies or diverting any funds away to other trades. This is a year long real money test of real market conditions and actual trade results for the STT+BSH combo.

I’ve been researching T5 a lot lately but it’ll be far separated from my main account. There’s a lot of opportunity with that trade and its juicy AF but it’s more fitting of my older previous life as a professional gambler. You have to look at it like a weighted coin flip in your favor but with regular total losses. I have to analyze Kelly criteria and risk of ruin as well as all the trade mechanics and market environment entry type stuff. Big project. Re what I mean : if you have a 55/45 edge in a coin flip, and you have 50k total, how much do you bet per hand to eliminate risk of total ruin so that you can infinitely take advantage of that significant edge? Is it 5k a flip? 2k? etc. You have to analyze this differently then something where you put all your equity in every trade and try to eliminate max draw down. Rather you accept the 100% win or loss and determine the edge and calculate the bet size. Should be interesting.

Mar 5 – Trade update and Historic run-up

My April trades don’t have that much more upside risk left. They’re all down @ about 5-5.5% on this record 15% move in 15 days. It’s actually a historic move and has broken a few records. A move to about 1100/1105 would bring another 1%/1.5% loss in the trade.

My plan is to add more theta to the trade and hedge the upside a bit with any pull back. I’ll do it in stages. If we get a touch in the 1070s, I’ll add some 1090 or 1100 call BWBs. If we get another touch in the 1060s, I’ll add more 1080 BWBs and so on. I won’t go too far out (probably 20 points above) and try beefing up the theta in the area and hoping for some decent pullback so we have a chance to break even or profit. If by Tuesday, there is no pullback, I’ll start figuring out how to deal with the theta and probably put on some 20 point out BWBs. A 5% pull back anytime in the next week would put us at a decent profit and allow us to re-adjust the trade or even just exit.

As someone posted in our skype group: All the way back to 1997, we have never had a move of this size without a single pull back. A similar pattern happened in 2013, we moved up 114 points on the QE business but that was as close as was found,and right now we’re up about 145 points. Truly a historic move. The RUT RSI is epic @ 91 and all indicators related are as extreme as you can get. The NYMO is now at 350. The all-time record is 375.

My trades are all down about 5% (15% w/ leverage). I expect an occasional 5% loss. Not worried about that. I am a bit frustrated and kinda demotivated by the challenges of the last 6 months. Starting in August, it’s been a silly environment that’s challenged me at every stop. From the Aug 24 crash, to the subsequent V reversal in October to the 22% fall from Dec 31 till Feb 11 and now I am dealing with a 15% straight rise (without break or consolidation). These challenges and dealing with larger money can suck the life out of you at times but to be fair, it’s been quite extreme environments that should train me to be a more astute trader. I am now looking over my plans to see if I faltered in how I managed the trades. I don’t know. I mean, I did use some technicals to my disadvantage and I guess around 1040 I would have added bit more upside hedges but nothing substantial was warranted. My play by play is that I was at -25 delta when Rut was at 1035. I added some BWBs and calendars, when it touched the 1040 area bringing it back down to the 22-25 delta area. I was satisfied, but then the last 15 minutes, we had a move to 1053 and my delta moved right to -25 delta again. The next day, I was convinced we were about as overbought as we could get and since I was hovering around the limits, I decided to wait for a pullback. The next day I got a little move down and put on a few more upside adjustments, again not much (enough?), RUT moved up again in the last 15-20 minutes to 1063 area. Super overbought. I haven’t really touched it since (a few additions). Now we’re at 1087 and down 5/6% with not a whole lot of upside risk left. Is my plan on waiting for some decent pull-back wrong or am I deer-in-headlights’ing it?? I think the odds of another sustained run is low and the odds of a decent pull-back eventually in the next 5 days is high. Without that much upside risk left, I believe the best is to wait. I mean we are at insane extremes. I continue to be patient as I was during the fall. Maybe this time it catches up with me.

I may even add some bearish butterflies if we touch 1090 🙂

Jan 7 – Trade Plan

What a brutal sell off to start the year. RUT is down 9% this week and SPX is a little over 8%. Yesterday was fine. Most of the trades were in our tents and profits were good. Today was a different story, the huge move and increase in volatility had the trades under water and, for many trades, outside the tent. The fills were horrendous and I resorted to shorting some ES/F, buying debit spreads and bearish butterflies to hedge the positions. I managed to close out a few higher BFs at a loss. The Rhino and RT trades can handle a lot, and they handled the 5-6% move this week fantastically but when it dipped below 9% and volatility increased, we started having problems with our P/L and with the trades themselves. That said, we’re positioned well into tomorrow and we would welcome a stall and decrease in volatility to get the trades in a good place.

Tomorrow, I’ll continue to add March Rhino positions with the great prices we’re getting and they’ll naturally be negative delta which will help hedge the other trades. My slight concern is a massive bounce which causes issues for the Rhino. I’ll also continue to add bearish butterflies and debit spreads as a hedge. The problem is not so much the big moves down but the fact that they’re occurring over night and there’s not much you can do about them when they already occur.

All in all, these trades are way easier to manage both emotionally and technically over the M3 and Weirdor trades. I was laughing (literally) yesterday when the market was down 5% for the week and my P/L neutral to up, however, that changed today and instead of laughing I was crying a bit 🙂 The increased vol and the terrible pricing on fills and the subsequent effect it had on P/L was a tad stressful.

Oct 7 (Oct M3 + Protector Update #2)

I’ll be exiting or at least taking risk off, throughout Thurs/Fri. With this 1.5% 20 point up move on the RUT, the trades haven’t moved anywhere since last week really and we’re just not making any headway. It’s just too much up (7%) and too close to expiry. I could have gotten fancy with it and added some tents in the front, but that’s outside my trade plan. The idea was to manage upside risk by keeping it relatively neutral and that means that we really aren’t making anything and in fact losing some profits as the moves are quick and the volatility drop was large. The mini pull back yesterday did give us a little bit of Friday’s profits back but todays “up” move took those away. It is what it is. The trades did fine through the moves but not even close to as great as we were on Friday when the trades were under the tent.

Re Protector Alpha: I increased exposure in equities to replace ALFA and I sold a few more puts to try and catch up on the payment of the hedge (which is behind now). I rolled my 199s and 198s to 200 on the dip today (good timing) and sold some extras (also good timing). Most of the equities did well or better than SPY today which was nice to see.I’ve got 205 December long puts that I have to start thinking about rolling to next year. Over the course of 3-6 months, we should be OK and any correlation and/or whipsaw effects on the hedge should be evened out. Sucks that we’re sitting just below a 4% loss on the year. Not much else to say here.

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.

Trade Plan – Sep 24

The market is going to open down slightly today at some major ES supports (1910-1915) with more support at 1898/1900. If we have a close below 1898, then we can expect a retest of the lows at 1880. If it can get above 1915, then I expect a retest of the 1940/1950 level. Yellen speaks today at 5pm EST and likely the market is going to putter around until then. I’ve got some adjustments to do today on the M3s for October and I’ll be looking to enter November trades.

The protector is down about 1.9% now vs SPY down about 6.2%. The protector lost a lot of value from Sep 8 till present due to the volatility collapse coming out of the long puts. The hedge part of the trade was what caused this loss. During the week of the correction, the protector was actually up about 1% due to the volatility in the longs. It did what it was supposed to do but the weeks following, as the fear leaves, the hedge starts to normalize and we experience some of that initial hedge gain dissipate. This is what is happening now.

The options trades have gained well during the past two weeks and we’re starting to go risk on today and tomorrow which might be good timing with this increased volatility.

Protector Portfolio Correlation Issues

We’ve had some correlation issues the past few days with the Protector portfolio. It’s still outperforming the indexes overall but it’s been a big drag the past 3-4 days. As of yesterday it was down about 1% overall vs SPY -4.5%. Today I expect it to close the gap a bit more and probably sits at about -2% vs SPY -5%. Still, not bad for a completely hedged portfolio of stocks but, of course, disappointing short term.

The reason for the correlation issues? One is Hilary Clinton released a tweet targeting Biotech companies with astronomical medication costs and the mechanical picks I had included some of those. So the market did about what -1.2% at around 3pm and my stocks were down a combined 1.8%. Yesterday was worse, we had MNK lose 10% on the day and the stocks lost about 0.7% on a day the spy lost 0%.

I am starting to go more risk on with the options trades (which all handled the 4% fall from 203 to 194 quite well). I’ll probably enter more tomorrow.

The market is in indecision right now. I can’t help but think it’ll test the Aug lows but who knows. The market opened and closed within cents the last few days forming very tight dojis. The market opened at 196.44 and closed at 196.46 yesterday and opened at 193.88 and closed at 193.88 today. This suggests that bulls are defending and that if the bears were going to score, they’d have done so with those gap downs and relatively strong downward pressure overnight. If it were to collapse short term, you’d think it would have happened yesterday or today. Though, all it takes is some more bad news out of China or anywhere (i.e. China PMI before tomorrows open I am told). It seems like they are pushing the market around during the overnight hours…running stops etc. That’s where the market is moving.

Sep 17 – Fed Day

Today’s the big day. I am positioned with very little upside risk and about 5% room on the downside via a series of M3s. Though, one of the 1120 M3s are now vega positive and if volatility decreases it’ll sag the T+0 line a bit which will cause me some issues. Nothing too risky at all. I plan to up my risk going into October and have been waiting for the market to settle down. I added a few 1150 M3s today since the volatility is still high and we can get them at a nice cheap price given the time till expiry. Again it’ll handle all upside moves well and has a good 5% to the downside before any issues.

The RUT has moved up quite substantially in the last few days (up nearly 50 points! which is near 4%-5%).

5 min to go. Can’t wait for this meeting to be over with and for some normalcy to return to the markets.

The alpha protector is down on the recent rise as volatility flew out of the long puts. I was somewhat expecting that. As it gets passed 204-205 we’ll see profits return. I rolled up the shorts today from 201 to 203 to give more upside room.

Sep 14 -Trade Plan

I removed most of the September trades today. I have a little left but not much. Somewhat a small recovery these past few weeks enough to get back some confidence. The losses now are more stomach-able. Having realized how drastic the moves where and how little they occur in history has relieved me. I’ve lost a summers worth of profits on an event about as rare as 1 in 10 years. Not bad. Soon come, I am ready to get back on the horse. I have a renewed focus on proper risk management and diligence in preplanning and back-testing. I’ve been spending most of my free time doing due diligence and backtests galore.

I’ve got just a little risk on for October trades as I await the Fed meeting on Thursday. I want things to kind of settle down (which it is starting to!) before going back full risk-on. I needed a small break from the stress of it all as well.

Obviously the recent events were somewhat traumatic. The drop of 10% in four trading days is quite rare. It’s only occurred 9 times since the Great Depression. The other times it occurred was of course Aug 2011, Oct 2008 (Financial Crisis), Aug 1998 (Long term capital hedge fund explodes), Oct 1987 (Black Monday!), 1962 (Kennedy intro’s steel tariffs), 1940 (WW2), 1938 (Fed policy error). Source: Doug Kass

The neat thing is that every single one of those had a retest of the lows within a few months. Only two of the above occurred in bull markets (which we are pretty much in now). They eventually went on to new highs (one took 5 months and the other took four months). Again, source: Doug Kass

If we retest the lows at 1875, I’ll be putting some risk on. In the meantime, I’ll be adding M3s and Bearish butterflies periodically and ramping things up. The high volatility environment should be quite lucrative in the months to come. We’re finally getting paid for our risk!

The protector is just about break-even (maybe slightly profitable). Pretty damn good since we put the thing on at SPY 205 and SPY is at 195 (5% down ish). But I am worried that the next few years, the environment may not be good for a long based portfolio even when hedged. I don’t know what to do. I think its probably prudent to just keep it on and let it run its course over the next few years. The mechanical stock picking should keep things profitable as it has to date. Eventually, it’ll do quite well. It’s a long term portfolio.

Sep 12 – Trade Plan

This month has been the third most volatile month for the markets in history only being beat out by the 2008 financial crisis and the 1929 great depression. The overnight moves were extreme and made for the toughest markets for market neutral trading. Overnight gaps in each direction in the 1-4% range were regular and intense and quick reversals came at the drop of a dime. Going from an extreme low volatility environment to an incredibly high one is always going to be very challenging period for market neutral traders. Once in a high volatility period, it’ll be much easier to manage and probably a lot more profitable but the transition can permanently take out a lot of traders 🙂

I struggled immensely the past few weeks but finally had a decent week with some recovery. The MICs do not trade well in this environment and can be devastating in unexpected overnight crashes. The RUT moved from all time highs to about 17% down in the period of a few weeks. Crashes like what happened on Aug 24 will wipe out most iron condor traders. Luckily, those events are quite rare. If it happened during trading hours, it’d be a lot easier to manage. A study was done and it was found that 50% of the markets movement occurs in the futures between 3-4am during the past 7 years I believe. The market is more efficient and swift than in the past and I believe that it’ll make MIC trading a lot more difficult to manage than back-testing would suggest. In contrast, all the M3 traders I know are mostly positive (one is up 7%) and, remember, it’s still a market neutral trade that really doesn’t like movement. Yet it survived one of the most volatile months on record. That’s incredible. I’ve had a bunch of M3s on but not enough to even make a dent in the MIC losses. It’s a very resilient trade as you can see with the below risk profile.

M3’s can handle market movements a lot better. Here is an example of an M3 risk profile:

The beauty of an M3 is how it compliments human factors. When I say human factors, I mean psychology and the things that challenge us within when trading. Things like taking losses with adjustments, or the opposite, adjusting to quickly out of fear etc etc. If you notice, you have no real upside risk and on the downside, you’re falling into profit being under the tent. So when you make an adjustment on the downside, you’re up money AND you’re usually taking money off the table. That’s a very nice adjustment in terms of human factors. As well, look at the room you have before you start losing money (almost what 5%?). Again, the beauty of managing this trade is its conservative risk profile, the fact that adjustments are mostly welcomed, and that a trader who’s keeping their T+0 line balanced will usually never have a problem with deviating from the plans so greatly that it affects the trade overtime.

Here is an MIC risk profile.

You can see that on a quick fall (overnight) without the ability to protect yourself, you can have extremely large draw downs. This is especially pronounced as you get closer into expiry. Plus, this risk profile is taken in a high volatility environment, having put this on during Aug before the correction, it’d be even worse. That said, if you had the ability to adjust (moves happen DURING the day instead of overnight), then this trade is easy to manage. Overall, I mean, I loved the MIC trade until this month. I had a really rough month in the melt up in October of last year and I had a real rough month this month with the extreme overnight movements. For me, I just don’t know if its a trade that I can justify having seen how the M3, Rock and Bearish butterflies react. I mean, the MIC is a great trade for the most part, as you have quite a high theta and being in the green each month had a 93% success rate. It’s the extreme moves that occur overnight that really hurt and excessive whip saw. Both of those causes are what hurt me in the MIC trades recently. In hindsight, I should have closed the MIC straight away instead of trying to manage it through the week after crash. Hindsight is 20/20.