Oct 8 (Oct M3 and Protector)

I am all out of the October M3 trades. That’s it. All out. I think we ended up neutral to yesterday. The next M3s will all be longer term with exits around 21 DTE. The planned capital will be lower and the profit target will be as well. Easier trades and they’ll be tracked here.

I am getting frustrated with the protector and am more and more tempted to just shut it down and take the loss. It’s riding around -5% for the year mostly to due with difficulties paying for the hedge and equity correlation issues. I’ll give it some more time probably.

Breaking it down, since the beginning of the year the alpha equities are down about 2.5% compared to SPY 3%. The gap was a lot wider before. The hedge is down about 2.5% as I’ve been whipsawed a little and fell behind in paying for it.

Oct 8 (Oct M3 + Protector Trade Update)

I’ve made the positions more or less benign going into fed and tomorrow. Not a great result overall as the market stuck around 1152-1154 area most of the day which was the worst place it could have been to start closing the trade down. We just never had any luck with the market and these Oct M3s.

The protector Alpha had another bad day with Ebay falling 8% (on no real news) and UHS, HCA falling 3% with only little corresponding positive offsets (GCP and EXC sitting at +1%). Just not having any luck with this protector portfolio right now. It’s weighing everything else down. Eventually it will work out but it’s uber frustrating.

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.

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 5 – Protector Alpha

As of Oct 2, the protector alpha is down about 3.5% (vs SPY -5.4%) and in the baseline portfolio we use 1.6x leverage thus the official trade is down about 5.6% real equity and probably a bit more today. The last month it has seen some correlation issues with the equities chosen vs the market. However, the mechanical system has outperformed SPY since the start of the year. We’ve also obviously experienced a little bit of whipsaw in the short rolls and quick overnight moves. These things will correct itself over time. It’s a long term portfolio. The equities will or should out perform SPY over time and the hedge will eventually pay for itself. The portfolio was up some money during the Aug 24 crash and the week following. The volatility in the longs helped and as well, the equities were still overall following the market. It’s just the past 3 weeks with healthcare and biotech falling, that we’ve seen some big disconnects. The challenges of trading 🙂

It’s definitely been the most challenging 5 weeks of trading for me. If it wasn’t the Aug 24 crash decimating my Modified condors, it’s an 8 trading hour 6% move that halves my M3 profits, or its a correlation issue in the protector alpha 🙂

Onwards and upwards I guess.

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.

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 28 (October Trades)

The RUT is at the August 24 lows (1098-1100) and SPX is at 1894 right now. That was a nice 9% drop from its Friday high. The OCT trades are still profitable though despite the drop. However, at this moment, they aren’t as profitable as they were and our catch-up from the Aug 24 fall is now stunted a bit. I mean, the volatility is packed in there thus reducing the price of the BFs and we’ve had to make several adjustments. Some of which were on the upside early last week and of course, I’ve obviously had to adjust on the way down towards the end of the week. Likewise, today I had to adjust pre 2:30pm because all of our delta limits were exceeded by a large amount. I did most of the adjusting on a little bounce to 1106/1107 where I sold a bunch of 1150 BFs and added in place a bunch of 1080 BFs. That should hold until we get to the planned adjustment point at 2:30. Looks like we’ll have to move around a lot of things. I don’t love the positions right now while we sit on a major area for RUT (previous lows) and having the volatility be so high. Who knows, if things go our way, they can still do good for a close probably sometime next week.

It looks like ES (SPX futures) will test the 1875 double bottom. We’re extremely oversold on most indicators so it should test and bounce but who knows.

The November trades are all doing great. They’re all up $.

As I get out of Oct trades and as things stabilize, I am looking to do more long term capital efficient M3 (double sized with same risk potential) but starting them 65 days out and closing before 21 days to expiration. The double sized aspect will offset the closing of the trades before 21 DTE where you’d expect a lower profit potential. A few guys I’ve seen, trade the M3s further out and close them before 21 DTE but they accept a lower profit target. They have very little stress as gamma is quite tame and it requires a lot less adjustments that far from expiration. My thoughts is to make up for the profit potential by doing a capital efficient double sized M3. Again. the double sized M3 still has the same total risk level as a normal

The protector alpha is not doing great right now. It’s had some correlation issues these past few weeks but that should fix itself over time. The stocks have still done better overall than RSP.

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.