Flattened all positions for a general change in strategy given our low overall IV environment and the fact that realized volatility has quite often been favorable in certain, defined situations. I will therefore primarily utilize naked long and vertical spread option strategies until volatility generally increases. My SLV trade resulted in a small loss due to larger than expected move in my direction. A vertical bull spread would have worked well and was justifiable given my outlook at the time. In other words, I was right in direction, but my chosen options strategy resulted in a loss. My LE iron condor was closed at a small profit because it was a randomish trade to begin with and my pending strategy change. My last ES synthetic straddle was closed at a small loss because realized volatility was less than expected and I decided to leg out the put side, which cost me a bit. I plan to reestablish a long synthetic straddle in ES using April 23 expiration for gamma scalping and expected reversion to mean play tomorrow or Monday. Still having focus issues. I wonder if Apple is planning a new iPad release soon? Grin.
Took a short term bear position in ES as I had a solid RTM setup on Friday. I am very bullish on our economy, equites, and tangibles overall, however. The trade management rules on this set require me to exit this position within 30 minutes of US RTH if this trade is not going my way. As far as buying a naked put on ES, I have a short term RTM on volatility as well. Awesome when trade idea goes in my favor quickly, say within a day, but painful, as can be seen by my open loss, if not. A vertical spread may provide a happy medium between a naked long options and a butterfly. I did consider closing this trade around lunchtime Friday, NYT, but decided to keep short exposure over the weekend in spite of Sunday nights often seeing significant equity index run-ups. If I do see a significant gap up on Sunday, my rules do allow me to add-on, although if I did, it would be at a different strike price, before my time/trade performance stop in my current position is activated. My RTM setup is the only one that allows “Adding to a loss”. I’ve exceeded my stop allowance again per current rules, But I’m hardly being financially irresponsible as my current weekly saving rate is double digits percentage relative to current journal l account value. I still don’t have an intuitive sense of risk with options. I am increasing my per trade loss limits to $1000, with naked long option positions being stressed at 60% of premium paid. Both of my iron condor trades, EEM and LE, turned out to be profitable, painless affairs that I exited too quickly. A wise trader might conclude that select iron condors might have a place in their overall trading system. Someday, hopefully soon, I will reach that level. Edit: The MES trades on 2-16 were the result of hedges of my ES put. Better focus. Maybe Apple heard my complaints!
It took a while, but I finally believe I figured out a certain aspect of options trading. Thank you, Destriero. While our politics are different, I think you’ll approve with what I’m planning to do with all the money I’m going to make! I will continue to post trade ideas with directional assumptions from time to time as well as my % daily PnL but not my trade history. Arf, arf, arooooo!
I was up a beautiful .18% at the close with 6.8% account utilization until RIOT sold off after hours. I am up .09% right now. Setting up a portfolio of various options strategies using multiple setups on different time frames is no easy task. I have to consider risk and how much time I need available to monitor positions. Below is a updated tentative matrix representing a summary of my trading plan using options: Setup Type Entry Area. Target(s) Stop(s) Method Reversion to Mean X dev. MA; X time Mean (MA) X dev. MA(x2); Time. Long P/C Continuation. Correction to mean X dev MA; S/R. S/R. Assym IC Trading Range. Mean; outlook Delta 0 after 2D Theta 0. 5/50/5 fly Reversal. WRB; other. X dev mean; S/R. xWRB. Long P/C (So much for formatting). Timeframes Short term, 5 to 10 days Long term, 4 to 6 weeks Maximum risk allowance per position, 3% of account value. Maximum account utilization, 50%. Sector/Thematic/Correlation concentration not to exceed 15% of account value. I will review term structure, skew, and leans for optimization of trade structure and edge. Long options will be about 45 delta, 1-5 DTE, with an expected holding period of about 1 day. Short verticals will be .45/.05 delta, 1-10 DTE, with an expected holding period of >1 day. If term structure is inverted, I will consider that as an indicator and/or a candidate for a calendar or diagonal spread. I need a model that will help me predict the effect of various scenarios on my positions and optimal short term hedging strategy, if reasonably feasible, rather than automatically liquidating multiple option spread positions due to costs. I need to consider the effects of extreme market conditions, such as probable increases in margin requirements, the effect of a major vega increase, and the likelihood of severely reduced liquidity. I will structure all of my trades to be defined risk. I need a more efficient way to visualize option profitability zones on a chart, preferably interactive according to changes in selected strike prices, on one screen. My current workflow is clunky. Need to optimize, as I missed a couple of trades this morning messing around with my trading platform. Increased account utilization, more concise setup rules, lower potential variance relative to capital at risk, and a more efficient workflow will turn my trading “Hobby” into a worthwhile secondary income. While my trading ideas have been good, my implementation of those ideas have been poor due to lack of options knowledge, conflicting goals, and a lack of discipline. But that is in the past. Onward!
Account value down .28% Thursday, mostly on a RIOT synthetic fly. Now flat except a DOTM bull spread on RIOT that expires this Friday, the 23rd. I will be making significant changes to my risk management plan to allow smallish synthetic straddles in select ETFs and large caps., for cost and ease of execution considerations. I will apply a stress test.. To be continued... falling asleep after driving most of the night.
After going over a bunch of scenarios, I realized how critical it is to protect a negative gamma position when using leverage in some form. Therefore, I will be committed to using defined risk strategies, especially on expected overnight positions. My directional synthetic trades require my position in the underlying to have at least 10 more delta than the short options side. For non directional trade ideas, I will either use a butterfly or a tight iron condor. My RIOT bear call spread appears to be expiring worthless, although I did lose on the overall trade because of my long in the underlying. Ramping up my trading size big time next week, although it will probably be about week before I’m fully utilizing my account value. Much better than using an average 6% of account value, but at least I feel strongly now about having a solid basis for justifying higher utilization. Now flat:
I usually over complicate things. Certainly have with trading. I feel understanding multiple methodologies are helpful as market conditions change. For example, implied volatility is lower now than it has been in a long time, yet each of the last three trading days of last week had fairly decent realized volatility with very smooth price action. There have been recent legislative proposals that while economically sound, might give pause to certain classes of investors. There is “Glaring” gap, now three weeks old in SPY, but historically, low implied volatility environments can last a while. The superstitious might note that VXX has been repriced from $10 to $40. On longer term charts, current prices are very far from their central tendencies. Not a record by any means, but in an area where at least brief, significant corrections have taken place. So while I have reversion worries, the bulls have a very strong case: Understanding of the science of economics and monetary policy has reached new heights and is being applied masterfully through sound legislation. Yes, I used the word “Science” in a sentence with “Economics”. A key metric, in my mind, to quantify our current economic potential, is the aggregate spending on wages in proportion of all business spending relative to historical levels. Other the last few decades, employer spending on wages dropped from over 50% of expenses to about 30% of expenses relatively recently. Then, and now, each industry has its own relative levels of wage expenses. To stay competitive, businesses had increasingly relied on outsourcing, automation, and implementing more efficient processes. Smart management on the micro scale, but it created a economic bottleneck in the US on the macro scale because consumers had to rely on other ways to keep up spending. Consumer savings declined, borrowing increased, capital spending, such as on cars, was deferred, as shown by increasing average fleet age in the US. The sharing economy arose out of consumers needing to become more efficient themselves as wages did not keep up spending habits and needs. The velocity of money declined as well as the “Multiplying effect” of stimulus, although part of that was related to consumer and business confidence issues after the 2008 Great Recession. This in turn, started to adversely effect demand on goods and services that required increasingly decisive government intervention to avoid a negative economic feedback loop. I believe money put into consumer hands, preferably through plentiful, decent paying jobs for cultural stability reasons, has the greatest economic multiplicative effect, ultimately benefitting all, including employers paying higher wages and wealthy investors paying a higher capital gains tax. Higher wages can create a positive feedback in our economy, in my opinion, and I believe the current Administration fully realizes this. Quantifying the potential of wage levels returning to just the median of historical norms leads to breathtaking conclusions of our current economic potential. There is always “A fly in the ointment”, of any optimistic situation, so to speak. It is human nature. Many people tend to become complacent after a period of success or easy going. This can manifest itself with excessive risk taking and reduced productivity, creating a systemic bottleneck and or instability, that will eventually affect our economy, causing negative growth. Effective answers to delay these manifestations, especially during high debt levels, requires sniper-like, micro-policies, that directly address over speculation, etc., but nothing beyond that, such as appropriate regulations being put on certain asset classes. Dealing with complacency related lower productivity is more problematic, but it involves society embracing a common cause. This is why we need to reduce political divisiveness in the United States sooner, rather than later. In conclusion, I believe the equities market will continue to grind higher for at least the next five years with corrections along the way providing great buying opportunities. I’m going to play the above scenario, starting the beginning of next week, by putting on trades that benefit from a “Grinding higher” market environment, but am willing to decisively play a correction by buying puts in quantity when identifying potential areas of “Polarization”. Edit: The above on wages increasing assumes either a more “Closed” economic system as in less trade, or similar policies among like minded countries.
Interesting thoughts. I've gravitated towards just one day plays in flies expiring sitting in cash 99% of the time. My thoughts are being in cash almost all of the time I should be able to benefit from a corrective move down or a sharp correction. How I would capitalize I'm not sure selling premium in overvalued puts as vol would spiked or just scooping up the index for a bounce. Other thing I like is no stress. I'm not monitoring any positions or staying up all night in /ES. I've got a day job that makes it hard to trade during the day but carving out an hour on Thursday to enter a mix of flies and time on Friday to exit is doable at the moment. I hope you're right about the slow grind up for five years. Would be nice for my 403 b retire before 50 and surf all day.