Been reviewing white papers on the correlation of short interest and investment returns. According to finviz.com, TSLA has a short interest that is over 25% of float. This is extremely high and it confirms it is a "crowded trade" on the short side. Yesterday's rally probably did not put a meaningful dent in TSLA's short interest. Although my time horizon on the TSLA trade is a little more than a week, I now have much more respect for yesterday's price move. The saying the current price reflects the sum of all investors and traders actions is felt here and now. I feel the need to reconcile my generally long term perspectives with my short term trading method. As indicated by extensive, in depth, and widely available academic research on trading, The tools are available to be more confident that my trading can have a positive, market beating expectation. I will not have to completely reinvent to wheel, as it were. I was getting ready to construct a relative performance trade that would tend to reduce market risk. My idea was that NVDA would outperform TSLA and IWM (Broad small cap ETF that correlates reasonably well with NVDA). I was to buy NVDA and short TSLA and IWM such that my estimated volatility adjusted exposure to market fluctuations would be 30% of the volatility of a broad index. After doing some research on this, I can across the eye opening papers mentioned above. I plan to exit my TSLA position on any short term buy signal that is generated tomorrow, such as penetration of yesterday's highs or today's open by a threshold amount. I will exit NVDA tomorrow as well. I am going to suspend trading in this account for the foreseeable future, at least into next year, in order to focus on researching various subjects, especially psychology, that are related to short term trading. After I become more knowlegeable and truly understand what it is I am really trading, I will post trade ideas again. It seems that short term trading is not really about the instrument itself, rather it may be anticipation of the reactions of other market participants to various events. On Friday I will post a screenshot of my updated account performance.
Closed TSLA butterfly @$1.80 and NDVA @$1.71. Would have received better prices earlier, but was unable to watch market.
TSLA has been sued by the SEC. This is particularly significant for a company that needs regular outside funding for its operations. TSLA's funding sources could dry up due to fiduciary obligations and potential legal repercussions to any potential future TSLA funder. Could this be the start TSLA's stock price death spiral? With TSLA's short interest at a huge 25% or so of float, I would imagine there would be quick short covering spikes only to be met by renewed investor selling and new short selling. Thus it may be a good strategy to use these price spikes as entry signals to enter bearish trades on TSLA or TSLA derivatives. Given today's politicial climate it will be interesting to see how this plays out. Could repercussions of the SEC investigation end up extending beyond TSLA? The top of the DotCom Bubble was reached when Microsoft was being investigated by the DOJ if I am understanding the history correctly. Indeed, if major investors perceive there is increasing risk to investing in US equities due to regulatory risk, they may change their investment allocation more towards other asset classes and or other country equities markets. Although Tesla's stock price is hard to price at this point because of unknown company and possible political response, option premiums are sure to ramp up dramatically. This should make short term, as in 1 to 8 day butterfly spreads compelling. The profitability zone should be particularly wide for this kind of trade. I would basically use the premium received on the body to pay for the most expensive leg of the spread. My net debit would be the premium paid for the cheapest leg. I would place the body not too far from tomorrow's open. I would also explore either by building the butterfly spread by using vertical spreads or buying the legs first to enter. It may be beneficial to seek out favorable prices through strategically timed and placed limited orders. I could also wait until TSLA stock price stabilizes and volume starts to taper off a bit, say after the first half hour of RTH trading, before deciding on where to place the body. I will not be short term trading for a while as mentioned in a previous post in order to study the psychological aspects of trading in depth and learn advanced statistics. This will take a while as the demands of my job on my time are increasing. I will post a summary of areas of interests in trading the pertains to trader types, time frames, and basic strategy as I perceive it in the near future.
Attached below is my updated trading performance for the third quarter: Interestingly, all of my top three winners originated in the European session. My biggest losers were positions held overnight. My intraday trading during regular US trading hours has been unimpressive. I chose to trade under suboptimal conditions and my intraday trading performance likely suffered as a result. With other demands for my time on the rise, it is futile for me to continue to attempt to continue with intraday trading right now. TSLA and NDVA had large news event related moves after I closed out my positions in them. The TSLA option butterfly spread increased more than 60%, basis midpoint, over what I sold it for. The NVDA option bull spread more than doubled in value from my Thursday sale. In essence, it appears fundamentals tend to generate news events that are consistent with the underlying company fundamentals. When I have available time in the future, I would like to explore ways to anticipate or even be able to see the precurors of events such as the SEC sueing TSLA’s CEO or a prominent analyst giving his recommodation to NVDA. TRLY is an interesting stock for butterfly spreads entered in the morning on day of expiration. Implied volatility is very high and there have been several Friday expirations that have shown much lower actual volatility. Looking to enter new NG trades in my long term account as the outlook appears to be bullish for the upcoming Winter season. My quarterly trading performance shows my account is up 1.36% with a stop losss level of .18% of account per trade for the majority of the time period these performance measures cover. Extrapolating potential account performance to more typical risk managment levels of, say 1%, implies a annual potential return of 30.2%, all other things being equal. However, some of my trades were not scalable to accomodate large size. My transaction costs as a percentage of my stock and stock option trades were higher because of my small trade size was below pricing reduction thresholds. I have much to learn before increasing my risk levels. I have made too many basic trading mistakes, and have missed important elements in my research. I lack critical knowledge of statistics and psycology to have confidence my trading performance has been more than luck. For now, I will continue to apply efforts to my high paying job with an eye towards short term trading in the future.
I would be honored, but have no time, not even for social media anymore. Perhaps after the new year and armed with a portfolio management account we’ll talk about that some more. Note the edit in my previous post above to reflect my risk adjusted potential account annual return of 30.2%.
OK, maybe I will have a little time after all. Finally I get a full days rest. Thought more about my trading performance last quarter and came up with some adjustments to my trading plan. The following is a partial list of observations on my trading: 1. I had several overnight losses that exceeded my tiny risk tolerance. 2. I close most of my losing positions before my hard stop is hit. 3. I have made several position sizing errors that have either resulted in my risk being too small or too large. 4. I am very risk adverse. 5. My low risk tolerance is resulting in underperformance versus typical risk taking levels. 6. My descretionary time is unpredictable and limited. Simply do not have time during trading hours to follow daytrades. Based on the above, I will make the following adjustments to my trading plan: 1. I will almost exclusively trade option spreads on a intraweek swing trade basis. This means almost no day trading, scalping, or naked positions. 2. My new risk allowance is now .36% of starting account value or $118.82 per trade, up from .18%. In addition, should I exceed 3.33 times my risk allowance in net profit this quarter, my new risk allowance level will be 30% of this quarters profits up to a maximum risk allowance of .72% of account starting value per trade. I would have hit this extra risk allowance last quarter if I had this policy in place. 3. I must calculate my overnight risk allowance to account for a 2 standard deviation adverse price move or about 75% of debit paid on a option spread that expires in the current week. Longer expirations will use 50% of debit paid for overnight risk calculation purposes. 4. I also must ensure I am taking sufficient risk for each trade I do. 5. I will post monthly screenshots of account performance. I'm putting on my g-suit and getting ready for CD beating returns! Arroooo!
When is a rally in US stocks of near 1% not impressive? RTY is down on the day and several non energy industrial commodities such as copper and lumber are down. Precious metals are down despite increased Mideast tension. Sounds like underlying growth concerns to me. I assume there will be a trade deal announced with Japan soon. However, China has upped the ante with eliminating tariffs on non US imports. The US has some strong counter moves but continued trade war escalation will ultimately cause a global growth slowdown through uncertainty and the reduction in business risk taking that inevitability goes along with it. I am now long 300 VXX at $25.95 with a stop of $25.65. Target open ended. Will hedge to a delta of .3 if held overnight. In addition, I bought 1 VXX Oct 05 $27.00 Call / Sold 2 VXX Oct 05 $30.00 Calls for a net debit of $.10 on this ratio spread. My stop is a print of $32.00 on the underlying. Update: Sold 300 VXX at $26.0516 of resumption of rally in ES and YM. Looking to add to my ratio spread on intraday price spikes. Update 2: Bought 1 BA Oct 05 $380.00 Put / Sold 1 BA Oct 05 $377.50 Put @ $.97 debit on this bear spread. This trade is probably a few years early as BA's fundamentals are strong in most ways right now. Obviously I'm expecting a gap fill in the next few days.