Apr 28 2021 – 15.5% Quarter and a 43% year

Been pretty absent from posting which has obviously become a habit. I’ve been all over the place the last 3 months and I think the lack of routine affects my ability to get posting which is contrary to the blogs intent especially with the travel portion. I just get caught up in new experiences and get behind in other aspects and my life becomes a time-balancing act but a well balanced one in regards to life and work balance.

We had flew into the US in October of 2020 to begin flight training and take possession of our plane. Exciting in and of itself, but probably a bit irresponsible given the pandemic was full blown at the time but we were committed with our long term renters in Cayman coming in at the same time. Cayman had no local transmission (and it was totally normal life there) so it was a pretty iffy decision, is what it is. We had expected to finish up the PPL there before Christmas but weather and thanksgiving instructor schedules got in the way and we weren’t able to finish so we left Dec 9th to get the quarantine over with before Christmas holidays.. As fate would have it, that didn’t matter, Canada went into full lockdown during the holidays

It was pretty exciting though because we took possession of our new home which has such an epic design and quality. Karin Bohn helped with the interior design, and subsequently the project got all over her YouTube channel which was pretty cool and my good friend Chris designed and helped build it. He put his heart and soul into it and it shows. I don’t think I could ever sell it. We had started planning the house back in 2016 as we’d planned on staying in Cayman and having a great home base in Caledon, Ontario which was near all our families but plans had changed with respect to where we’d school our children and LA became the choice. We’ve rented our house in Cayman and now will just go back and forth between Canada and LA. Anyways, we stayed there till about March when we went back to LA (with the intent of staying 2 weeks) to start searching for our primary home (we found an awesome house/project in Hidden Hills), but opportunities arose to finish the PPL in Knoxville, Cirrus went and picked up my plane and I flew to Knoxville to train. I ended up staying behind and trying to finish up that pesky PPL while Ash went back with the kids to Canada. I finally solo’d and made a ton of headway towards the license. We’ve done the training pretty unorthodox as we’ve used the plane several times for utility trips (picking up au pairs, family, flying to various places for $100 hamburgers etc). So I’ve gained experience in so many different ways. Here’s some photos of the training and solo.

While in Knoxville, I got the vaccine (Pfizer) and worked hard on the PPL which went really well. Had some incredible experiences. I flew with my instructor to pick up the family in Canada. The original intent was to go back in April but the pandemic in Canada got so bad that it just wasn’t worth staying. So we grabbed them, whisked them away from the never-ending lockdowns and explosion in COVID cases and brought them to Knoxville for a week. Here’s some photos of the Canada pick-up, the dogs were excited to see me (oh that was another new thing this quarter, we got them in January, I was afraid they’d forgotten about me but from Teddy’s reaction here, it was clearly not the case.

We stayed in Pigeonforge and I got to fly back and forth to Knoxville for training and finally solo’d and was about 10 days away from check ride, but we had closed on the house in Hidden Hills so we went there for a few weeks (here now). Another cool experience, I got to fly the dogs and cat to LA from Knoxville. Wild. Here’s some pics from the super long cross country from Knoxville to LA

Teddy in the back, chilling.

We’re in LA now until about June (assuming Canada gets better). Then we’ll be back in September full time. Whirl wind of a life lately. Looking forward to settling down where I am just making my way back and forth between the two houses. But have to say, I’m loving this neighbourhood and the general area. The kids are live in school (finally) and we’re looking forward to the big life change from the Caribbean to western civilisation.

Here’s a few photos of the new neighbourhood plus a cool sketch/art of the project.

Isla rocking her new bike
Putting up a TV. Getting innit.

Despite all this wildness in life, the quarter was great, doing 15.78%. Finally moved towards non-discretionary trades and by March, was fully allocated. Throughout the quarter I furthered some research efforts into ‘meta-portfolio’ construction and the movement toward a more time and skew-diversified approach with respect to my individual trades. The sum of these individual trade types within the total portfolio of trades allows for a smoothing of variance which allows for better compounding of returns over time. I’m thinking long term, and I am approaching my portfolio of trades with wealth conservation and low-risk growth as the primary objectives. The result and implementation of lowered volatility by way of diversification will yield a better compounding of returns over the course of years. I am lowering the volatility tax, and in turn raising the profitability of the portfolio of trades. In my opinion, compounding via the reduction of portfolio variance is the true secret to beating the markets.  A high volatility portfolio that averages 15% per year could underperform a very low volatility portfolio that averages 10% a year over the course of a few years. Taking this concept and applying it to the portfolio of trades is the focus and part of the edge.

Meta Portfolio Compositions and back in the grind!

Made my way to our new temporary home for the winter and spring. The place will be our forever home in Canada and act as our main base. We still are trying to figure out if we’re going to make our way to LA for the kids education but we’re getting tired after this last build and move so who knows. That said, I miss how easy things were in Cayman, it was like a free-for-all in terms of pretty much anything/everything re being able to just live life. I am met with blocks on everything here in Canada. Everyone seems to want to create problems. It’s bizarre. They won’t even accept my international license or cayman license and want me to start off with a learners permit, they’re having a fucking laugh. I’ll just continue to use my Cayman license, just means I can’t register my cars until I can find some Canadian insurance company that would insure me without a CAD license. I also find myself talking on the phone to customer support for hours a day for a variety of things as well. Real life sucks apparently lol.

We’re here until at least the summer and though we’re 90% going to LA, there’s a small chance we’ll fall in love with this property and stay here. Though, man, I just don’t know if I can “regular” life it here like I said above. It’s probably irrational but there’s a lot of weird feelings about raising the kids here and I mean, its fucking’ cold. Though, having the plane now gives me some pretty cool options to escape and the hangar is literally 12 min from my house. I can fly to Myrtle beach in like 3.2 hours for instance. The property is 100 acres located just 25 min from Toronto international. So the location is perfect and close to the international airport and acts as a great base to our families (we’re both from area originally and our families are here). That was the intent…have a second home near our families but it became much much more than that as the project developed and the budget increased…..

One of my best friends designed and built it same as he did for Cayman so it’s been a fun challenging project and his tenacity for efficiency, his skills and his ability to keep the project a value creation device has allowed for a valuation much higher than what was put in. So I am super happy and both projects have provided me with value. He’s been actively helping me manage investments so it might be his pièce de ré·sis·tance or swan song as he moves more towards trading. Or perhaps he continues on but treats it like a hobby or it’s a bit of both. Who knows. Here’s a few cool pictures of the property (which isn’t 100% complete yet but liveable). It’s got a VR/Sim room which will be decked out with a star wall, RGB lights, and 4 setups (our family are PC gamers…no XBOX whatever or PS whatever allowed in here!). We have a sweet swimmable hot-tub on the second deck, an infra-red sauna, several cool fireplaces, a speak-easy etc. It turned into a true chalet like experience. Our furniture hasn’t yet arrived but I think it’ll be here in 1.5 weeks. We’re making due with what we have, it’s exciting because so much is not done and we’ve got limited furniture so it’ll only get better. Fun and frustrating at the same time I guess.

Probably the only space that’s 95% completed. The entry.

The outdoor ceiling is not complete yet but it’s coming!
Void of furniture but what a view!

It’s coming…
Missing the furniture but it works!

We landed in CNC3 a few weeks ago and hangared the plane. I still need some more hours but the weather has been shit and instructor availability as well. Things happened slower then I hoped. I really wanted to come back licensed fully.

The entire break I’ve been concentrating on meta portfolio construction as a means to reduce drawdown and increase geometric returns. I’ve come up with using 3-4 OTM style trades that we talk about in the PMTT Group as a base income producer and with my own spins and each are composed of 4 different types of BSH. These are put on in campaign style with the average being about 10 weeks of campaign. This gives time diversification. So we’re now diversified in entry timing, OTM income production and BSH provision. On top of this, I combine 2 black swan type campaigns that provide additional protection over all. Then I have an aggressive harvesting style that really translates into back ratios at a variety of strikes on older maturing trades. So basically, 10 different time entries, 4 different strategies, 4 different BSH styles, a bonus 2 hedge type factories and harvesting. About as tight as you can get.

  1. 4 Types of Out-of-the-money income strategies put on across 10 weeks giving time, strike(skew) diversification
  2. 4 Types of BSH protection put on across 10 weeks giving time, strike (skew) diversification
  3. 2 bonus types of BSH factories/hedges put on in campaign style across 4-6 weeks giving skew and time diversification and 2 additional fail safe swan protections
  4. Harvesting aggressively all structures that are matured

You’re left with creating less draw down and increasing compounding returns which is equally important to the trade strategy itself. It add complexity sure, but I mean, this is all I really do now and it’s systematic. That’s a preferred method for me.

I’m finalising all the time series for each of the campaigns from 2014+ and I’ve noted that there is adequate response differences to a variety of environments and together they provide a smoothing of return. In my mind and as I mature as a trader and as I have started getting consistent results, I’m convinced that the key to success at trading for a living comes with diversification both in time and in strategy. You take 6 known alpha producers and you do 1/6th each. It helps with human factors, as you’re much more likely to follow the system/rules if it’s just some annoying small part of the portfolio not the entire thing. The options market has a funny way of causing you to draw down from the tops.. You’ll be sitting at 80% profit target and one day you’ll draw down to 50% for no reason (market hasn’t moved) and you’re becoming price fixated and often times it does preclude a vol event and from there you’re just waiting for that old 80% to come back because you think you can rely on time. It’s a fools errand not to follow the systems and rules. You’re much more likely to do what you need to do if it’s just a 1/6-1/8th portion of your portfolio.

As mentioned before, the last 6 months have been pretty much straight opportunistic ebb-flow ATM style trades taking advantage of the environment. I’ve just started implementing a systematic portfolio based on the above post and from there that’s all I’ll pretty much do.

I am back at my desk for 8 months so I hope to blog more and post interesting things the best I can.

Jul 15 – Update

Given the events of February/March 2020, I had to re-evaluate risk and its presentation in each of the components of my portfolio. Though it was beneficial to add what I consider a god level data point for backtesting purposes, it was not fun to go through. It was the fastest decline and recovery in history. There is no tougher environment to trade through with complex non-directional options strategies. I ended up positive through the event despite the fact that things were broken in the market structure. Things happened that should not have happened. I saw things that I am sure I’ll never see again. This allows me to reconsider risk through what was one of the most market destabilizing events in history. This breaking of various markets and market components has given me a peek into what was naked when the tide left and allowed me to dig deep into my compositions and fine tune with risk management as the main motive. It motivated me to create a systematic approach to my base trades for entries, exits and adjustments. It took 4 months of hard work, but I’ve designed a system that accomplishes all of the risk management goals while maintaining returns that will compound better than before due to the reduced drawdowns. The key to this is maintaining global convexity despite being locally concave in risk profile. This means that risk where it is defined and quantifiable (local risk) while maintaining/financing the ownership of global convex risk on the tails. Short locally and long globally.

The more variant a portfolio is the more it impacts your geometric return. I have an edge, but if I am in extended drawdown, there’s less capital exposed to that edge. The less you draw down the higher your geometric return. It’s the power of compounding and is what Mark Spitznagel calls the volatility tax.  The big losses are all that matters to your rate of compounding. Makes sense right? Manage your risks, maintain an edge and let compounding do its magic.

My primary interest lies in the long volatility tail space and coupling that with localized complex option income production. Globally convex locally concave. The long volatility tail portion of the my portfolio closely corresponds to what Universa, Nasim Taleb and Mark Spitznagel research, it’s a convex payout on extreme market events. When you tie in global convexity (extreme payoffs in extreme events) think of the convex shape (shown below) with local concavity (necessary for regular income production), you end up with the best of both worlds. Absolute protection and income production on the tails (which are rare) coupled with regular income production locally.

The composition of both elements in the options space has benefits that are astounding as it not only gives you capital during turmoil but it protects both a traditional portfolio as well as one composed of options. You prevent event draw downs and have made significant returns that can be actioned at market bottoms. That effect is exceptional. The combination of long vol with a traditional income strategy is what allows for the highest geometric return profiles.

Coupled with the long vol tail hedge, I’ve worked on systematizing the income strategies that are completely mechanical in nature. There is no room for human bias. I worked out a mechanical system that has no decision bias in both the long vol component as well as the income production component.  It prevents the human factors issues that can cause mistakes and under performance. 

We’ve got so many great data sets now, we’ve got the vol events of Aug 2019, the bear shocks of Oct and Dec 2018, the volmageddon of 2018, the time skew issues of Aug 2017, Aug 2015, Jan 2016 and so on. We’ve got a plethora of data. The period from February to June of 2020 used this data to do a deep dive into restructuring the portfolio and analyzing its risk factors. It was long, arduous and sometimes frustrating when you realize that everything has risk and the only true way to eliminate or minimize is by true diversification. 

The lock down forced me to work long hours daily to re-evaluate my systems and to fine tune a new system setup. This was a period of heavy backtesting, reading, daily hour long phone call discussions with a trade buddy, trials, and analytics.  I left no stone unturned even exploring things I would normally say was trade style heresy. The main discovery is the need for systematized approach in all base core strategies. The management is systematically rules based. My entire portfolio will follow this tenant. It’s a minimization of human factors. As Jerry Parker puts it :

“We are not really interested in people who are experts at the french stock market or german bond markets due to technical nature of trading…it does not take a huge monster infrastructure: neither Harvard MBAs nor people from Goldman Sachs…I would hate if it the success of Chesapeake was based on my being some great genius. It’s the system that wins., Fundamental economics are nice but useless in trading. True Fundamentals are always unknown. Our system allows for no intellectual capability.”  Jerry Parker

Related to the above statement, I’ve had a realization to systematically use quantitative analysis and trend indicators to manage trades with respect to risk, entries and exits. QA gives me a way to manage the trade risks systematically while keeping me on the right side of the market trend, it’s what the university endowments use and it’s what Jerry Parker helped systematize in the 80s and 90s. I am using it to err the trades in the direction where the sum of the quantitative analysis points us.  The delta adjustment range is -3 to +3 per unit. If it’s a bearish trend, we’ll keep it in the -3 range and if it’s a bullish trend we’ll keep it in the +3 range. Lastly, it lets us know when to exit trades. If we use Vix/Vix3M ratios, force index, OBV, ATR expansion etc we can avoid every major event in the last 10 years. I have now incorporated mandatory exit signals. If the signals do not show and we have a black swan, that is protected as well because of our long vol component.

It’s important to have a system that removes emotions and biased decisions. It removes human factors and that gives you something that’s concrete and sustainable. Decisions cause fatigue especially when tied to large money. Through the lock down, I tried investigating several things with an open mind, including taking advantage of zero day premium trades (PR hedgies)  and cycle indications trades. This led me to making polarized decisions on an hourly basis. That’s not sustainable, it’ll exhaust and it’ll burn out. It solidified my requirement for a systematic rules based core portfolio. You can adjust/fine tune the rules but you cannot disobey them once they are live.

Oct 10 Trade update (STT-488,STT-484 and BSH Factory)

On the 8th of Oct, the market fell pretty hard into close and the skew/vol were favourable to enter a 488 STT, so I did. I allocated about 25% of the planned capital as the conditions weren’t quite good enough for a 50% or full entry. I was able to cash out at 40% profit target the next day. I did. Why did I only do 25%? There’s probably 25 entries since 2014 where I’d go 100%, however that said, I have to re-evaluate my criteria as it was implemented for the 484 which is a slightly different trade. I may lessen the requirements for the 488 by a fear spike and VIX 18+ for at least a 25% allocation. (VIX is really a very crude way to measure the entries, I just say it because everyone knows it and what it represents re market conditions..but in reality I’d be looking at a whole slew of things to determine entries). If VIX is above 27 and we have a capitulation day, I’d probably switch to 484s unprotected but everything below that I think a 488 might be the answer. I still have to confirm backtest everything and how the exact opportunistic entry system will work but for now it’s a start.

As mentioned a few times, right now my portfolio consists of a blend of a TAA base, some bond rotation (low vol–municipalities, senior loans etc etc), a strategic LTI portfolio, some sectors rotation and a cute factors system. The above represent a 0.75:1 on capital. Then on top of that, I have an active BSH factory for income and lotto. The BSH factory method I use now produces 18-20% a year but will return incredibly during an Aug 2015 (161%) or Feb 2018 event (62%). This is a producer in large events (crashes). On top of that I have 15% allocation to at-the-money (ATM) options trades such as the Rhino and bearish butterfly. If we have any large vol events (opportunity) I’ll enter 488s and 484s. This is my portfolio.

I closed out most remaining options trades except the allocation I have to ATM Rhinos. I have a bit of January left and that’s it. I will work to close those as the next week or two go by. Mostly in cash in terms of options allocations. I am forming a new BSH factory to try and up it’s size relative to my account, it was a bit lower. Not a whole lot else to report on re trades.

Oct 3 – STT and TAA Trade Updates

The account just hit 30% for the year which puts me at about 10% a quarter. Happy about that. I was hoping for a better (greedy) end to the trades but the market movements prevented that. The market stayed in the upper range and started to tap on 3020 which forced me to start balancing the upside risks and after about 10 days I just decided to lock in profit and remove significant portions of the trade. If I had done nothing, this sharp little 160 point drop would have netted much more. Just this afternoon on that very sharp rebound my account hit all time highs so I took half off and removed a lot of my risk. The sharp little flash crash today from 2892 to 2857 had actually knocked the P/L by almost 4% but now its fully recovered and well profitable (and most of the risk is closed).

As mentioned above, I decided to close off half of the account today on the bounce to 2905. The Dec STT dipped down about 60k during todays mini flash crash from 2892 to 2855, albeit that’s likely just temporary due to option pricing gaps between bid/ask but has since recovered to +10k on the day. Good enough for me and given the market movements and the news climate. I will wait for some opportunistic entries and be happy with the profits to date.

Funny enough, I entered 40 units of 488 yesterday and they hit 1/3rd profit target today on the afternoon ramp. I took it. I’ll always ladder my profits according to days in trade especially if it’s within the first week. One thing we must be careful of is that if these are opportunistic, and you’ve got nothing else planned, then if you start taking lower profits (the profit target is $1k, I took about $380) and you have a max loss of $2k, well, this could be a problem as you’re not capturing enough of the 1k wins to offset the max loss. However, for me, this entry wasn’t the only thing I put on and I mean, it was within one day. Any further down move, I’ll slap some more on with less vol requirements as I had with yesterdays.

I am becoming a big fan of risk reduction via non-correlating strategies. So I am more and more starting to add in a variety of things both as a base as well as opportunistic. I’ve got a solid momentum based TAA along with low vol bond rotation as my base.  It draws upon theories from several white paper authors in the tactical asset allocation realm, such as Keller and Keunings white papers on Vigilant Asset Allocation, Protective Asset Allocation, and Generalized Protective Momentum as well as Gary Antonacci’s white papers on Dual Momentum factors and his Risk Premia Harvesting paper. I’ve setup my own little combo of these and other things to create a nice long term strategic base portfolio that produces ~11% CAGR on average with a 5% MDD since 1990. Will it produce this in the future? Who knows, but that applies to anything. I worry mostly about the safety rotations ie IEF and TLT and as such I’ve mostly removed TLT as my safety rotation and changed it to IEF (that helps temper expectations a bit) . I mean, the last 10 years, TLT has produced 10% per year which is equity like w/out the equity risk. That won’t last. If we have a long period where rates just stay stagnant the returns are much much less. If rates fall to zero then it’ll be great (initially) but after that any increase will be horrific (for returns on TLT/IEF). So yah, bonds will def underperform going forward and much of these backtests rely on rotation to bonds so we have to be careful not to expect the same, that said we probably have 5 years before we have to worry about this.

I started to add in Rhino’s again and I actually got some on at 86c yesterday. That has to be a record price for me and I’ve been trading them on and off since 2016. That’s another opportunistic entry.

The plan going forward is to run the base portfolio (which consists of 8 different strategies each adding some non-correlation) coupled with the BSH factory, a variety of ATM trades, and finally opportunistic Rhinos and STT.

Sep 18 – Trade Update (STT Trade)

I recently (and finally) hit profit on that trade I was nursing since Aug 1. I probably over-hedged a bit during Aug as the skew and vol went haywire and the modeled positive deltas were just a bit too overladen with risk. I probably entered 20% too many bearish stt and probably sold a few too many ES shorts but at the time and with the bipolar nature of the market on any tweet, I felt it prudent to eliminate some of the risk. Further, on the subsequent up move I just couldn’t convert the bearish STT as quickly as I’d have liked too but hey profit is profit. There was a lot of whipsaw too that crushed some of my ES short hedges. The big positive was that I managed risk like a boss but the negative is that it’s resulted in under-sized return as I wasn’t able to take advantage of the vol and skew present because I was managing risks of low vol entries. I’m now moving my trades to opportunistic entries only. I’m talking big down days where forced liquidation are occurring.

I’ll end the month of Sep having made about 3% maybe 4% from Aug 1 to Sep 30th. Not terrible given the environment re skew/vol and the news environment. It got a bit crazy there with tweets. I think I’ll end Q3 right at about 30% which is 10% per quarter on average. I am happy with that and it’s in-line with what I figured. The next quarter results will be entirely dependent on opportunistic entries. If we don’t get the right environment, I won’t be able to enter the juicer STT options trades and I’ll be reliant on my base portfolio and BSH factory. Is what it is…happy to wait for opportunities because when they occur it’ll make up for the stagnant times.. The conditions I’d like to enter in have happened just 25 times since 2014 so it’s going to require patience. The returns from those entries are much higher and you can often get out within 11 days (that’s the average length of time). I’ve seen that the trades will produce the same overall, with very small chance of large draw down and very little time at risk. I mean, the average days in trade was 11 and there were 25 of those, that’s 275 days at risk out of 6 years of trades (That’s like 1/7th of the time).

I leave on Friday to Necker to celebrate my 40th and 20th anniversary. I have no idea what to expect, it’s pretty damn ridiculous but we pulled the trigger because well, it’s two huge milestones. Maybe its worth it maybe its not. I won’t know for another 2-3 days. I imagine there’s some life value in going…maybe? Wildy, and good timing, just two days ago I did have a pretty awesome poker score when my coach got 2nd place in a WCOOP and I had a piece of him. It netted me more than enough to cover the trip, and covers poker buy-ins for a while now. LFG. Anyways, it’s a perfect time because luckily my trades are neutered and carry barely any downside risks and I can just unwind and leisurely work on some projects I have going on. The onllly issue right now is that there’s like a hurricane forming and moving right towards where we are going. Hopefully it fucks off.

So I probably have 2 weeks left with my current STTs, I have about 70k theta per week and by Oct 10th I’ll probably be fully out of the market re STT type trades. I’ll have a small BSh factory and some LTI stuff and I’ll be sitting and waiting for a big down move. Any 5-7% move down is while I still have on this structure would be worth a LOT of return (another like 10%)! So it’s welcomed! If that happens, then my luck is disgustingly sick and I’ll be removing the entire thing and entering brand new ones. Easy plans going forward.

Trade Update (STT+BSH+Bearish STT)

At the start of today, I was so close to forming the 30 BSH but I just missed my price and the VIX/Skew changed again and those way OTM puts rose in value and now I don’t wanna pay the extra 30c as I am fixed on the previous price because thats just how trading psychology works. Price fixation, it’s a weakness lol. I got some time though. That would have been cool, formed in 10 min market time 🙂

I didn’t trade the futures open and it just went where it went. I was tempted to use a breakout trading plan to further hedge but I just never ended up leaving it and I think I am pretty much as hedged as I can be. Today at market open (while I was flying from Milan to London–>I love internet on planes!) around 2855-2865 I ended up closing some of the ES shorts I had on, I have 7 left of 14. On the run up to 2875, I purchased more Bearish STT and I closed off 20 more STT. This adjustment puts me at exactly 0 delta. My UEL is now like -300k so I def will have to massage this as time goes by slowly converting the bearish STT into an STT. As time goes on, my deltas will get more and more negative as my tent builds up. This will be when I start converting on dips. If I don’t get the fear dips, then I’ll just let time play out and start converting and aim to get as much as I can out of the hodge podge structure.

Here’s my Dec structure (includes original STT and my entire bearish hedge structure)

Dec w/ the bearish STT portfolio adjustments

Here’s my Jan structure after adjustments today

Jan only (this position is down but was hedged by ES shorts not shown

Here’s my combined positions as ONE displays and with it set to Jan expiration line. It’s my loss on the structure but I had 14 or so ES shorts from 2915-2922 area that gained a lot of value and aren’t included in this. As well at the fear bottoms I sold puts in some equities that I follow (GooG) etc that are all up. Also doesn’t include the gains on the BS hedges and the shorts I sold on Friday. I was about +50k, now down -150k but the structure is good and my theta is 14k a day and my vega is -107k so time and vol relief are on my side. Combine this with my BSH positions and it’s pretty safe. I’d love to end September at ~250k (end of Sept risk profile at very end shows 300k). Sounds nuts but that would be pretty much the entire summer profits on a large portfolio. As quickly as I went from -8% to -4% then to +60k on Wednesday is as quick as I went from from +60k to -150k (vega mostly). It’s also how quickly (with reduction in vol or time passes) I will get back to profit..its a game of patience and risk management.

Current as is in ONE
Current – Showing Jan expiration Line
T+35

Here’s the entire structure in 14 days with a small decrease in volatility

I will wait for a spike in vix/fear and replace/roll the 30 STT I closed at a loss in the January expiration. I got the pricing during Friday and it was at about 2.50-2.95 credit and right now it’s at about 2.00 so I’ll put on an order at about 2.40 area. I’d be happy with that given I paid 2-3 dollars less to close off the STT today as opposed to Friday towards close.

My last 2 days of travel are in London and I’ll be heading back to Cayman Aug 29th (I’ll have internet the entire flight, so I’ll be active). Then I just keep massaging this structure as time goes and as we enter Sept. Towards end of Sept, it’d love to be in the 2650 area so that’s a lot more room to manoeuvre.

Aug 23 – Less Talk more Rock

Less nuanced talk…

After reading my previous posts, I realised just how nuanced the language is and how it’d be only relevant to a few people which got me thinking that it’d be interesting to try to explain all of this in terms non-complex options traders could understand. I mostly write this blog for myself as a record of my thoughts, plans and actions as well as for entertainment and perspective differences for all the crew in the mastermind group.  

I guess I’ll start with where these ideas came from and what the style of trading is.


We’re a group of people that came together with vastly different backgrounds and strengths. It all sorta started when Emeric and I formed a Rhino trading Skype group back in 2015 that ended up attracting hundreds of people, including Ron Bertino (the founder of PMTT). That ran for a few years and Ron ended up taking over the admin portion of the Skype group (I can barely keep up with a travel/trading blog let alone managing and admin’ing a large Skype group) and eventually we all moved over to slack via the newly established PMTT group. Most of us have been working together for the last 4 years trying to explore and tackle the dart arts of “out of the money” complex options trading.  We are a vastly diversified experienced group that includes quants, some professors, some fund managers, some managing 10s of millions of their own money and others are straight up small retail traders and even others that barely trade (Delayvis) and are mostly in it for the intellectual challenges. The area that we are dabbling in was quite unexplored and very nuanced. We’ve had our ups and downs and certainly had our egos kept in check with a lot of explorative strategies that went sideways after much research. Why? I explain below.


Many of our models fail or ideas failed and the current modelling software available still hasn’t done a great job of predicting risk curves and market responses. We try to remove or mitigate most of those risks (Out of the money options risks) as well as modelling differences in an effort to capitalise on this alpha (the additional return). The alpha mainly comes from the premium in the markets (the need for insurance from big portfolios etc) as well as being one of very few groups likely exploring the areas we are exploring.  When we started in 2015/2016, we only had end of day data for options from 2008/2009 and on and really the only testable data was 2011+ with incremental hourly data.  This means that things we’d test really had very limited data sets and when you got into super complex positions though they’d test well and the modelling software would show reasonable profiles, they’d eventually get busted up in live trading. This constant evolution coupled with the fact there are very bright minds in the group has bolstered the testing, strategies and executions to where we are now. It’s eliminated a lot of types of trading and eliminated a lot of the unknowns that we experienced previously. Out of the money options trading really is a dark art like I mentioned at the beginning. We do have a lot more data now in tumultuous periods like (Feb 2018, Oct 2018, Dec 2018, May 2019 and Aug 2019).

So what are we really doing at the very basic level?

We’re insurance salesmen who also insure ourselves. That’s it.


Options can be thought of as insurance. A person can buy insurance at any level in the market (known as the strike). Someone might say I only wanna lose 2% max in their portfolio and they can purchase insurance 2% below the money. Another might be comfortable with a strike 10% below the market and they can purchase insurance 10% below the market and so on. If the market is at 2900, you can buy insurance at 2895, 2890, 2875 and so on.  The prices of insurance vary at each strike. Now as we all know, insurance prices in any industry has some fixed things in the pricing and a pricing related to risk (is it likely a hurricane is coming, pricing goes up!) this is the same as “fear” when related to market insurance.  As you can imagine, each price of each level of the market can vary in how it responds to an event in the market. The 10% below market has a “fear” portion as does the 2% strike and this amount can vary for each strike based on market pressures not only at the time you put it on but how it reacts to any event.  This is kinda known as skew.  It’s pretty much unpredictable in any real sense except when it gets stretched or abnormal you can expect a reversion to mean eventually.  Also, every insurance contract has an expiration date. The closer it gets to that, the less value an insurance contract has until the risk portion of the premium gets to zero at expiration. That’s our theta (or the average amount the contract will lose every day (we gain) with all other things remaining the same).  So we sell insurance for a premium but we also buy insurance in this complex setup of contracts that creates a risk profile graph. All of the positions we enter will generally have a positive theta (a time based deterioration of value that benefits us). For instance, my current portfolio has a theta of 11.5k a day. Which is on the high side but that’s because we just came out of a high volatility period where the premiums got jacked up and now we get the benefit of it having to come out before the contracts expiration date. I can expect to gain that over time and on average every day but if we have a super negative tweet from Trump about the trade deal, I can expect to take a hit on my account because my trade also has what’s called negative vega. Which is it responds negatively to volatility. Generally, a positive theta trade has negative vega. My negative vega is currently 100k!  If the volatility in my options go up 1 point, I can expect to take a temporary draw down of 100k. This is the price we pay as risk brokers. But! as you can imagine, as time goes forward, there’s less and less days in the contract and less and less vega can affect it. Vega acts on the time portion of the insurance contract. That’s not considering weighted vega effects re OTM but that’s for another day. Just speaking in generalities.


Options can be thought of as insurance. A person can buy insurance at any level in the market (known as the strike). Someone might say I only wanna lose 2% max in their portfolio and they can purchase insurance 2% below the money. Another might be comfortable with a strike 10% below the market and they can purchase insurance 10% below the market and so on.  The prices of insurance vary. Now as we all know, insurance prices in any industry has some fixed things in the pricing and a pricing related to risk (is it likely a hurricane is coming, pricing goes up!) this is the same as “fear” when related to market insurance.  As you can imagine, each price of each level of the market can vary in how it responds to an event in the market. The 10% below market has a “fear” portion as does the 2% strike and this amount can vary for each strike based on market pressures not only at the time you put it on but how it reacts to any event.  This is kinda known as skew.  It’s pretty much unpredictable in any real sense except when it gets stretched or abnormal you can expect a reversion to mean eventually.  Also, every insurance contract has an expiration date. The closer it gets to that, the less value an insurance contract has until the risk portion of the premium gets to zero at expiration. That’s our theta (or the average amount the contract will lose every day (we gain) with all other things remaining the same).  So we sell insurance for a premium but we also buy insurance in this complex setup of contracts that creates a risk profile graph. All of the positions we enter will generally have a positive theta (a time based deterioration of value that benefits us). For instance, my current portfolio has a theta of 11.5k a day. Which is on the high side but that’s because we just came out of a high volatility period where the premiums got jacked up and now we get the benefit of it having to come out before the contracts expiration date. I can expect to gain that over time and on average every day but if we have a super negative tweet from Trump about the trade deal, I can expect to take a hit on my account because my trade also has what’s called negative vega. Which is it responds negatively to volatility. Generally, a positive theta trade has negative vega. My negative vega is currently 100k!  If the volatility in my options go up 1 point, I can expect to take a temporary draw down of 100k. This is the price we pay as risk brokers. But! as you can imagine, as time goes forward, there’s less and less days in the contract and less and less vega can affect it. Vega acts on the time portion of the insurance contract. 


Let’s give an example, lets say I sold insurance for hurricanes pre hurricane season for 5k and it expires in 4 months.  I take on all the risk of hurricanes and I get 5k to do so. If I wanted to offload my insurance contract to a re-insurance group. What would I sell it for?  Well if I had 3 months left, I’d probably say hey I’ll sell it for 4k (pocketing 1k) because there’s 1 month less risk. What if there was 2 weeks left? Well, shit, I took most of the risk and there’s like only 2 weeks left, I’d sell it for say 500 pocketing the 4500. That’s theta in a nut shell. BUT we gotta figure out what Vega is! Let’s say there’s 2 weeks left but news just came out, there’s a hurricane barreling down towards us. its a 15% that it’ll hit, what do I sell it for there? Well there’s 2 weeks, we got a 15% chance, so it’s definitely higher than the 500. That’s vega.  What if it was 50/50? Vega would act on the 2 weeks even more. But as time ticks, every day the vega effect is less and less.  What if we had 3 months left and we got a report that it’ll be a very active hurricane season?  Well, that would probably put me in a loss position for the insurance I sold 1 month earlier.. but only temporarily. Vega and Theta are interlinked. 


It’s kinda a fun game.  For instance, lemme go through what just happened to my portfolio in August..


I was pretty much entering in low vol which really wasn’t what I wanted to do but I wanted to keep the theta coming in, and I wasn’t yet convinced about exploitative STT trade entries. I understood any transition to higher volatility would bring on draw downs (though usually temporary).  I sold insurance when no hurricane was on the horizon, just trying to get the basic premium present in a non fear market. However, I was only like 40% invested. I saved the other 60% for higher vol entries (opportunistic).  Then came the first move from 3020 down to the mid 2900s. I slammed on some since it was the biggest down move we had since like May. Then I fist pumped slammed even more on when we touched 2920/2930 area (the forecast was suggesting hurricanes were kinda possible). VIX was still relatively low, but off the lowest of the lows. That means that the insurance premiums I got were meh but OK.  Probably VIX (vol index) 16.  Then came the down move of the first weeks in Aug. Skew/VIX acted a bit weird (An expectation of that a hurricane was coming). The insurance I sold went up a lot in value (a draw down) but my black swan insurance barely activated (the hurricane didn’t arrive to activate the swan insurance but the fear was maxed out) thus I had a temporary draw down of about 7-8%. Now, usually on moves like this, the BS insurance activates a bit more. My expectation is that any further large down move it’d kick in and we’d start going towards even…but I am concerned (as mentioned in my last post) about how the volatility regime has changed and wondered if there is a path where the STT can continue down in PL and BS doesn’t activate.  In either case, it’d be fine just a bit stressful. If it continued down and BS didn’t activate, I’d roll the structures, I’d probably have a max draw down of about 10%. The new STT would be extremely juicy and extremely resilient being very very very far below the market which is a great thing but we wouldn’t b feeling so great here being down 10% on the roll. As vol subsided and time moved on, I’d eventually get profit out of it and of course correct the draw down. No-one likes a draw down and it feels like crap so it’s not like its ideal. The more ideal situation is that of the older vol regimen where we’d have spikes down and large VIX reactions that put as at break even and we just roll and work the market. If the market continued down even after the roll, we’d have not that much trouble even towards 25% from peak (very rare), I’d likely have to roll again and surely at this point the BS would have activated at some point.  It’d take a few months but we’d recover but mark-to-market would have some swings. 


So anyways, OK, not the nicest feeling but I was up about 30% for the year so it’s not terrible and this is the fun part since we can make most of our profits from rebounds on these types of falls as the majority of our premium and potential is closer to the insurance tent in the risk profile. Then I can convert it into a hedge and wait for more vol spikes


So now at this point, I realise that any pause or stoppage in the fear will bring a quick rebound in P/L and every week of market indecision (and no further crash) is closer and closer to expiration and less and the less Vega can affect (and the more theta converts to my profit). But I also realise that I have to start looking at heavy rolling and risk management because the vega and negative delta is getting steep. So on the first rebound, I add bearish STT (a mid way hedge) and I roll my closest STT as well as short ES.  All of this is a cost but on some down moves, I start selling PCS to convert part of the bearish STT. All of this is a cost…but its largely offset by the fact that we’re in a juicy area of the original trade if we get some vol relief.
One week later I was down about 4% from a draw down in the fear spikes of 7-8% and then just days after that I was profitable on the Wednesday( fed meeting). IE my entire portfolio trade was up about 65k from Aug 1 which is great given the events that transpired. I’ve got a load of hedges still on that compliment the risk profile. The risk profile I posted includes all hedges (Except the Black swan hedge).  Now yesterday was a slightly different story. We had a change in skew (the volatility portions of each strike changed) and I had a draw down to about -7k on the trade but does it worry me? NOT AT ALL. It’s a reaction to the fact that we have an important event on Friday (one being Powell speaking at 10am) and the fact that we didn’t have continuation in the up move. Skew and vol reactions w/ out market moves are generally temporary in relation to the specific structures I trade.  So an area where I sold the insurance either went up or the area I bought went down. Pretty much it. But its all temporary.  If we move up today, we get weekend theta and moving into next week is 4-5 more days of theta and less ability for vega and skew to affect. I predict I am back at the highs pending no big move by end of day today, I’ll post my graph either way to see.


Either way, now its a fun time of having the clock tick and getting further and further into our trade letting it mature. By sep 9 ish, my trade will have a matured risk profile that doesn’t mind more larger falls and starts to become more and more of a hedge profile as I massage out risk and take profits. My aim is to get it to about 250k before I go away. That’s sick. Yes, these trades mature every day and become not only more and more resilient but they also get massaged into hedges for newer trades that have a lot more time left.


Here’s the thing I realised, I tested just entering these trades on massive fear spikes (IE selling when the hurricane is barreling down). This happens a few times a year (probably 4-6x with Trump) and it eliminates most of the risk and has the same return as if you entered monthly (always on). You can do 15%-20% on capital and if you get a few a year, that’s 30%-40% with much less risk, draw down, stress, management and time in market. 

So yeah, It’s a risk game where we syphon out the premiums on insurance.


The most common setup we use is known as a broken wing butterfly. Which is defined +1/-2/+1

Current portfolio Risk Graph

This is my current positioning of my entire SPX STT options portfolio sans the BSH of course. This is Dec/Jan mixed together. It’s profitable now since inception and I’ll be working this trade through Sept and closing before my 40th birthday/20th Anniversary trip to Necker (ridiculous I know) but YOLO?

Will be managing it diligently and removing risk and locking in profit. When I get back it’ll just be opportunistic STTs from there on in.

Aug 21 Trade update

Man, I really wish I would post more. I get so damn behind in traveling and this just gets totally forgotten about. I am really really sick of traveling and I think I’ll probably stop most of the longer trips as the net benefits and excitement are now becoming benign. I haven’t really been home since April. It’s too much.

Here’s my gut take on the version of STT+BSH trade I do, which is tailored in methodology to my preference (higher UEL etc). Since Feb 4, 2018, the volatility regime has changed significantly. There was a loss of several large market components ie the collapse of several inverse volatility ETFs, which were a component of the market structure. They arguably amplified (and dampened) certain reactions in the pricing of options and, more importantly, out of the money (OTM) options pricing. It had a large imposing effect on how volatility works and how option pricing reacted to market moves.  Volatility indexes such as the VIX is measured by the fear reaction in options pricing. Options have varying strikes, and the reaction happens differently depending on just how far out the option strike is and the positioning of the strike in general. Picture each strike price as a bar where some of that bar is coloured grey, now pretend that grey price is the fear portion of price. Each strike’s grey bar may react with different magnitude during a market move. This is known as skew.  A strike at the money may have a different % reaction in fear than one 5% out, and so on. Skew is not predictable in any actionable sense. 

How this relates to OTM trades and corresponding BSHs?  We purchase way out of the money insurance by way of a black swan hedge, and when we have a black swan or major down move, this has been our protection. However, since the volatility regime change, these OTM options have not activated as much as they have in the past. The % moves in SPX are not corresponding to the increase in pricing in way OTM options and Vix is not spiking the same relative to the % move in SPX. Another theory I have is that previous to 2018, there was no real open interest in these way OTM strikes, it is in fact our presence in the market that’s perhaps causing an additional opposing effect on the activation of these insurance structures.  Having open interest as large as the PMTT group would or could cause a levelling effect to volatility responses just as the inverse VIX indexes provided an over-reaction. Who knows but I think I might adjust some things.

Since Feb 2018, we’ve had several large market declines since then including the Oct and Dec declines which saw several moves within the time period where VIX should have spiked to >30, but it only spiked to 20. This was confirmed again in May of 2019 and this month (Aug 2019). The market has changed. The over reactions in vol are now more efficient and muted. This is probably overall neutral. This means that the income trade portions don’t lose as much, but also the black swan counter part does not activate as much. The problem is just how much MDD you’re comfortable with. With the OTM income trades that are initiated in very low vol (12-14) and the market transitions to higher vol. Our income trades are so negative vega (volatility) that we will have a roughly 7%-10% draw down on our income structures. Basically like all VEGA/Skew change losses. Typically bear moves have a spike, and BSHs activate and we can roll both the BSH and the income trades at minimal cost. In the new regime, it appears it’s not guaranteed. This has made me change my methodology going forward as my theory is a lower overall draw down provides for much better compounding effects and overall higher return. As well, going from low vol to higher vol can have margin expansion and prevent having capital to enter the juicier opportunities.  In the most recent event, you could get close to profit target on an STT in 6 days whereas it usually takes 75 days. That’s 69 days less risk!

I’ll probably be only entering STT+BSH income trades on a large fear spike found when the market is in a forced liquidation period and when the VIX is >21.  These happen a 2-3 times a year on average, but the tests indicate that it’ll do 15- 20% on capital per trade with incredibly less risk, much less draw down potential, and minimal time in the market. Our income trade exposure goes from 365 days in market to 65-75 days. 

In the August event that just happened, I am now slightly profitable BUT I did have some temporary draw downs that reached 7% due to vol and the BSH did not activate. I saw things in the models during that event that I did not like given I initiated these in lower vol environments and the transition hurt. The issue was specifically, the night when we had touched 2790 after hours. If it had opened at 2790 and slowly went down, the draw downs (IF the BSH did not activate) would have been larger though potentially temporary as we’d roll and eventually likely recover. But we’d miss the best opportunities, and it causes fatigue as it requires a lot of work to manage. Entering in a high vol regime negates tons of % of that risk. 

Since Aug 1 to now, I am up a few % and that’s pretty damn cool. My structures a bit more matured and resilient as time passed by. I will massage these and my theta per day is currently 11k but I’ve adjusted from positive delta to more negative to lock in small profits and to minimise risks. I’ll massage this into Sep and only enter new ones in big fear spikes. I am expecting to end September at 35% for the year to date on capital.

I’ll be doing BSH factories in income and hedge format, opportunistic STT and LTI stuff as a base (12% return per year with 6.5% max draw down). Done and done.