trading dominion – Travels and Trades

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.

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.

Jan 2 2021 Trade Portfolio Updates

Didn’t get as much as I wanted done because …Holidays and distractions… enough said 🙂 Despite that, I’ve hit the ground running and I am working on creating some meta portfolio management which I mentioned in my last post. The idea is to really take advantage of diversification across strategies that aren’t correlated to create a combined time series that provides increased geometric returns by way of lower drawdowns and better compounding. What Mark Spitznagel coined as a volatility tax. We reduce that and pay less “tax”. If you have a lower return each month but you have less draw down, you compound it better than a higher more volatile strategy and so on. To me, it’s all you can do, diversify (smartly) and not just for the sake of diversification but true meaningful diversification. I wouldn’t ever just put all my eggs in one single strategy in one single week with a planned capital the size of my portfolio. There’s just too much reliance on how those specific strikes and BSH will react. Plus, it’s sorta fun having previous entries mature and act as mid bear hedges, harvesting and knowing that a single entry with bad timing is only 1/10th (well really 1/30th) the portfolio is a nice thing. It takes time to build up sure but it’s like 2.5 months. Who cares.

There’s a series of OTM (out of the money) type strategies (3 of them that I use) combined with a bearish toned ATM (at the money) trade to pick up the middle bear (non crashy moves ie Aug 2019, Oct 2018, Dec 2018, Jan 2016). Each of the OTM income portion is diversified in mostly its strikes but also the type of BSH it uses to pick up during a crash. A 488 will react differently then a 484+BSH then a HS3EZ (not saying I use those well, maybe idiosyncratic versions of one or more of those) both in it’s income production and income engine as well as its black swan hedge that it utilises. There’s some diversification, it’s not perfect but we work to reduce that imperfection by time diversification across 10 week campaigns (1/10th at a time) along with 3 additional BSH/Vol hedge type campaigns. The 3 BSH vol hedge type campaigns are factory based (ie they build up over time) and they are meant as a triple redundancy insurance towards the 4 other income strategies. But in reality, they should produce lotto like returns in a crash. One of the BSH/Vol type hedges actually generates income and helps compensate the costs of the other two. We then have as much redundancy as we possibly can both in the income strategies by way of time, strike/skew diversification, and BSH diversification built within the income strategy plus we have 3 additional BSH like stand-alone factory type strategies that should provide full assurance during a a crash and most likely a lotto return. Not sure you can do much more than that.

It’s systematic and the fact that you’ve got 10 different things to manage reduce human factors at a cost of management complexity which is my job anyways.

Speaking of which, I feel lucky to have found something that I wake up looking forward to and what will likely occupy the rest of my working life. I doubt in my life that I’ll ever pursue entrepreneurial projects again. I went through my 20s and 30s setting up some successful businesses w/ my wife and two other partners that I still manage (mostly as a board member). I give over-arching direction and make sure things are running in line with the plans set forth but there’s no day-to-day which set me free. We started the business in 2004 and I finally got out of the day-to-day around 2017. I just never liked dealing with humans and human issues in the workplace. It gets complex quickly and is often irrational and I feel just out of control when dealing with human resources. I know that’s super odd to say but maybe I can expand on it. I started a software company and I am not a software developer. Maybe that helps 🙂 I have to rely on my team to correctly advise me while making business decisions and dealing with customers demands while having an expertise that was relevant but outside the central operation of the business. Make decisions, go back to team, they tell you impossible, you know it is possible but can’t be quite sure because your experts are advising you and you fight and they end up getting it done /// rinse repeat. I always wanted my “money making” life to be me and a screen and that’s it. Very few outside “human” variables, very little reliance on anything but myself, my decision and the game environment we call the market. When something went wrong, it was something that was on me. Something that I could perhaps think my way out of. Not something where I had to rely on someone else. That was my goal and though it took like 5 years to really work that out (trading is hard…mostly because you have to meet parts of yourself that you might be unfamiliar with…and protecting yourself from yourself takes practice and time..and really just a system and recognition).

In my opinion, the attributes (besides the obvious skills) necessary for successfully trading is self reflection/humility, ability to take risks and tenacity. If you lack one of those, it ain’t going to happen. The risk taking portion has to be smart, unemotional and well thought out..with outs and with a system. One thing I’ve learned in life and I’ve seen it time and time again is that you can’t talk many people out of taking risks when they’ve become emotional about it. I can list like 10 situations which made me cringe and are very poignant lessons, some are horrible. It’s a specific type of person too. If someone decides that they are going to gamble, take a business risk, buy a stock, or whatever it is that has a possibility of changing their life trajectory, I found that it’s often very hard to talk someone out of that risk even if you give them good reasons. .Once they make an emotional decision, that’s it. But, if someone is humble and self reflective you can often advise them against and they back off and reflect. If you do take that risk, you need outs and you need to become tenacious (that’s where tenacity comes in). I took loads of risks in my 20s that I should never have, and now I have a process that protects me from making emotional decisions…I did have that tenacity though and the risks weren’t emotional though they were probably way to high a risk of ruin. Unfortunately, for success, you often really need the ability to take risk, you just can’t do it with emotional baggage. When I took those risks, I’d be like fuck ok…I’m in it now, then I’d create outs and I would literally not stop (sacrifice sleep (80 hr weeks) to make these risks work out. Stupid but tenacity got me out of jams and I learned that we often take risks for excitement, for that dopamine rush and to be very mindful of that. This is why you often can’t talk someone out of an emotional risk, they have already decided they need this rush this thing that can change their life (or destroy it) because they need to feel. When you do take a big risk, make sure you have control, several “outs” and be ready to commit your entire being to making sure you don’t fail. Tenacity, Risk-taking and Humility are the key ingredients. Look at the logo on my plane tail. Badger (Tenacious little fucks).

On to personal stuff, I got up in the air twice so far since being back (quarantine affected that). What a wild experience though, we flew to Muskoka (took 24 min from Brampton), then over to Toronto to do a fly over of the city. We asked the tower to do a direct fly over of YYZ (the busiest airspace in Canada) and was approved. This is a once in a lifetime thing to do…it was EERIE cool. Not a single flight (landing or take-off) and completely empty. Here’s some pics. I’d write a whole lot more on the blog re what it’s like to do a PPL in a Cirrus SR22 if anyone had interest. I just don’t want to bore.

Downtown core (CN Tower and Sky Dome) Direct fly over

YYZ EMPTY! Busiest airspace in Canada. Pandemic effects..

Jul 16 – ATM Trade Update

I’m hitting (well above) negative delta limits on my current Aug ATM trade and am looking at ways to reduce it now that July expiration is over and that was providing me some positive deltas. It’ll get more and more negative delta as it progresses into the month so I’ll deal with it daily and continuously raise up that Upper expiration line. This trade represents a planned capital of 5,000,000.

I had the deltas in line a week ago but the reduction in vol and time passing has brought them quickly out of line. The BWBs in August are no longer giving a credit but would give some positive deltas and theta/risk. I think I’ll save those for a larger down day. We’re down about 0.75% today so I’ll have to start looking at PCS maybe even some call structures (call calendars or call BWB). I haven’t had to do that yet post crash as the bwb credits were sufficient in raising that UEL and eliminating upside risks.

I am looking at 3325 calendars, 3250 calendars (mixed) along with a 11 delta 75 wide PCS and I’ve already got some long ES to temp hedge.

So yeah, let’s go over the Aug position:

It is at -1450 or so delta and has pretty significant upside risk to the already existing profit of $125k. So we have to do something. We do benefit from vol release on up moves but it’s not enough. I’d like to get it down to about -700.

Here’s the trade looking forward 14 days

We’ve got massive theta, great risk reward if we get our deltas in-line and decent non-black swan downside risk profile. The previous expirations (from May till now) were a lot easier on the upside so this one will be a bit trickier.

Dec 3 2019 – Trade Updates

The last two months have been quiet for me. The low vol run up meant that I had no STT trades on and I was left with just the LTI/Tactical asset portfolio along with a few ATM trades. Still at about 30% for the year and any big down move that causes a VIX 22/23 move along with some evidence of capitulation/forced selling/margin call will allow me to enter a nice STT that could catapult the return to 35-40% for year end. We’ll see if it happens.

Today’s down move got me perked up and I am keenly watching for entry opportunities. If it doesn’t come, it is what it is. We’ll keep waiting. In the meantime, I did enter some ATM trades today using the vol to get decent prices. It’ll give the portfolio some potential for a decent year end. I’d love 35% but with these opportunistic trades, profit will come in bunches. My backtest shows that 2018 would have been a 100% year if I was entering with the same parameters I have now. Today, we hit 18 vix and I was hoping for an EOD type sell off and a further weak open to eye up some opp. 484stt with elevated >22 VIX but alas we bounced into close.

The idea going forward is to do the TAA blends, some ATM blends and opportunistic STTs (I might only get 1-2 a year but they’ll boost the TAA+ATM for a solid 40% average return over time). I can post all the ATM stuff I do without regard to the IP restrictions of the group so maybe I’ll start just posting my daily updates of the ATM trades so there’s more content and commentary here. I’ve halved the PC for risk purposes but it boosts the LTI returns while we wait for STT opps. I much prefer to be patient and wait for great entries than to deal with extended down moves and vol increases with OTM type trades.

I had a busy few months traveling, which I guess was good timing with what was a “never go down” market until now. I hit up LA with my family to look at schools for my kids, then met my guy friends there and departed my family and had a guys trip that extended from LA to Denver and Miami. Good time but when combined with my last trips in September, my liver needs a good cleanse.

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.

That was an interesting day!

So that was an interesting day. As expected my portfolio has fallen due to vega issues. Normally not that stressed but this is kinda a weird environment re this trade war. I am not so much stressed about any permanent draw down or loss but more so managing the rolls and dealing with fills (if we drop much further than 2825). It’ll mean that the trade will take a lot longer to get to any reasonable target. However, if we crash, I should be perfectly fine with the BSH hedges.

I’ve got 115 STTs on in Jan expiration
I’ve got 80 or so Dec STT but coupled with loads of bearish STT adjustments
I have 14 ES shorts
I have 100 puts in Sep 19 expiration at 2125
110 BSH in Oct 17 expiration (only 54 days to expiration though)
20 BSH in Oct 31 expiration
95 BSHE in Oct 31 expiration (just ratio)
30 BSH in Nov 14 expiration
30 BSHE in Nov 14 expiration (just ratio)

So I have on an estimated 195 STT, 100s of bearish STT and 285 black swan hedges of some form and 100 long puts in Sep. So should be hedged against any crash by far. Typically, 1:1 on a Aug 2015, Feb 2018 event should get you break even all said. If they activate I should be in a profitable situation. Especially given the BSHE have not yet sold the additional short just yet.

Trump tweeted “Who’s the bigger enemy Jerome Powell or President Xi?” That’s so messed up on many levels and it creates a confusing trading environment. My trades are back to about -4% or so. Which is expected with that increase in fear/vol. However, I am sorta in a really sweet spot if we should stabilise anywhere between 2750 and 2900. I really don’t know what to think re what’s going to happen here but I hope it slows down else things get a bit annoying. If it goes down hard but without a crash like trigger, it’ll get rougher before it gets good. I’ll have to initiate rolls etc and it’ll take longer to reach any reasonable P/L. If we have a sharp crash, I should be profitable as I have about 195 STTs on with a LOAD of bearish STT, BSH hedges and ES hedges. If we move around between 2750-2850 over the course of several weeks, my P/L will be fantastic.

Today: Here’s what I was doing/thinking through the past few days:

On Thursday, I got on 25 bearish STT and sold some ES shorts at about 2922-2930 area. I wasn’t loving the move to 2937 during after-hours but it wouldn’t matter since I had tons of theta and I’d get my target. The previous weeks I had put on 100 or so bearish STT and converted some over to regular STT. I have this big hodge podge mid-hedge position over the past few weeks. All in December expiration. Overall I am still negative Vega by a far amount so any increases in Vega hurt. The move from sub 16 to 21 VIX did hurt the trades as predicted.

On Friday, Before the 10am Jackson Hole events, I was building up some hedges mostly to start the massaging process through September to get my P/L up to target before my trip. The plan was to get them more negative delta and just let the market move about. I sold 8 ES which gave me -400 deltas then (this was a bit weird) I had a bunch of bearish STT trying to fill then trump tweeted, we fell to 2919 quick and then rebounded and it for some reason filled, then we went straight down. The day before that, I got another set of Bearish STT when the vix acted weird on Thursday. So yeah, pre-trump I was about -300 delta all said. When the vol kicked in and the market fell, I ended up at about +700-+900 (Sans the ES hedges). This is the effect of vega on delta. I ended up day trading the ES to build more hedge. Every bounce I sold more, and then covered at specific points and resold over and over again to build it up to -14 ES shorts. I also added in BSHE and closed some units of STT.

I did sell some short puts right at 2835 EOD for a BSH factory and the market bounced to 2857 after close, those puts were then 80c cheaper. I almost closed them but didn’t. I don’t know what to expect Sunday/Monday but I am sure we’ll test 2825 and I’ll probably wait for confirmation of a bottom before closing off my shorts. If we break 2825 I’ll have to roll some STT and ride this thing longer than I hoped. I’ll be aiming to complete those 90 shorts to make 30 more free BSH on any bounce on Monday.

So I guess we find out what happens on Sunday. I am trying to analyse my portfolio and post it here but ONE data doesn’t work on weekends…..so I can’t do anything until Monday.

I think I am pretty solidly hedged and setup. I was profitable on Wed now I am down about 4%. It’ll take some time to get it back but time is on my side unless we have a Dec style slide down that doesn’t activate BSH, then it gets more painful as we roll and let time work.

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.