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.

May 22 (Trade Plan)

Busted the tournament in Day 2 (200th out of 529). Ran into another damn 3 outer that crushed my stack and that was the start of the end. Exiting main hurts bad every time. I had managed to get my stack up 50% for the day. Felt good, near average. I had AQspades SB vs BTN. He raised PF in the BTN, I three bet in the SB and he called mandatory with K7s. the flop had a K on it with two spades. Check/Bet turn is an Ace, he checks I shove..he calls and hits a 7 on the river. If I had won that I’d have been above average and ready to compete for the end. I’m always super emotional after a tournament (When I bust to these ridiculous hands) after having put in hours and hours of concentration. The good side is that my game has never been better, I’ve been playing really well, I have confidence in the game I am playing and I guess eventually it’ll work out. I guess I got two day 2’s out of the trip. I busted the 1k with a BS hand as well as I previously wrote. That was 240 or so out of 1540…..One of these have to damn well connect. It’s never about the money, its all about the competition 🙂

When you’re early in the tournament you’re usually not at risk re your entire stack. It’s the day 2/3 when you need a few 80-90% EV hands to not run bad on you! I get it in with the best of it and just get run out of. I am running bad. I haven’t been able to get it in positive more than 1 time in a row deep in a tournament. Unfortunately, you need 2-3 good hands in a row to chip up and if I don’t get these I can’t win. I mean AA vs AK in 2018 vs Ryan Reiss, I had KQ on KQ8 in the barcelona to exit to 88. Or A8s vs A2o in the Barcelona main only for him to hit the 2. Blah. Any one of those 5-10% go the other way, I’d be deep running.

My trading account is hitting about 19% today which is the only positive thing today 🙂 I removed most of my Aug trades today and have dry powder. I was able to get 60 short puts sold for my factory but I wasn’t able to get on more STTs today which is annoying, well maybe not, there’s 10 min left in the day, maybe my orders will fill.

Off to Ottawa tomorrow for a comedian show and some meetings. Then I am making my way to Toronto and over to Moab for a wedding. The next tournaments will be Vegas WSOP. Let’s see how those go.

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

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

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

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

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

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

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