Correction: My current open ES calendar spread is with calls, not puts. Will probably close put this trade today. Current price 4.40 X 4.85.
Closed my ES calendar spread at 4.75 for a gain of 2.10. Looking at the history of ES term volatility structure with the next few option expirations, Friday's implied volatility has been increasingly become more inverted from later expirations. My guess is there a lot of hedging going on for Friday's expiration. The later expirations are actually seeing significant declines in implied volatility. With the market being the perverse beast that it is, I wonder if we decline hard next week, where there is much less apparent protection seeking? Looking at the daily chart on ES, so far this week the price action looks like a pathetic attempt at consolidation. I bought an ES calendar spread: Long ES Dec 17, 2018 2600 Put / Short ES Dec 14, 2018 2600 Put for a debit of 3.25. This trade is cutting it close to expiration, but I wanted cheap exposure in case we have a "manic" Monday. The short Dec, 14 put option goes away on Friday, with its high implied volatility and all. Also looking for additional bearish trading ideas for next week. Perhaps I'll put on additional option trades with expirations a little further out near this Friday's close.
Closed my ES calendar spread at 5.00 debit. I was originally planning to convert this trade into a bear spread near the close where I take some profits off the table and reduce my theta exposure over the weekend for expiration on Monday. However, the ES rally in the last few minutes was impressive because there was no meaningful pullback after a quick spike in my ATR indicator. I probably should go long here for a quick trade to unchanged, but I will be content waiting for better pricing for a strategy that anticipates range expansion next week. I also have a lot of backed up errands to do this morning.
I see the spread I sold for 5.00 is now 9.00. It turned out the earlier move was just a short wiggle out of context with the longer term move. I was actually surprised we sold off somewhat hard in the first place for this Friday. At least I didn't go for an intraday long. My thoughts were more along the lines of next week being the big sell off. For next week, I bought another calendar spread. I am long the ES Dec 24, 2018 2500 put, short the ES Dec 21, 2018 2500 put for a net debit of 1.50. There may be more optimum trades for my given scenario, but at least I have some protection against surprise trade progress over the weekend. Hoping to have time this weekend to throughly analyze my trading statistics, but am just getting over the flu and looking for a new place. Early next week I intend to be much more active trading.
Intramonth Trading Performance Review and Adjustments. I have seen progress in some areas of my trading. In other areas I still need to put in a lot of work. I will now apply different stop loss levels depending on the trade type and my performance with it. Intraday trading, other than hedged straddles, has been a net loser for me. Part of it is my continued bad habit of chasing entries. Another may be related to less retail participation. There seems to be less liquidity for entries, which leaves less time to execute a trade at favorable prices, than before the market went into bear mode. My adjustments will be as follows: 1) Reduce risk tolerance to .18% of account per trade until profitable with this trade type. 2) Stop chasing entries. Enter a new position when it is quiet versus recent action and the risk reward, based on support, resistance, or momentum is favorable. In other words, I need to be focused on anticipating price moves instead of reacting to them. 3) Focus on high priced, active, and high beta stocks for intraday trading to reduce trading costs and to be more likely to have positive money flow correlation to risk based assets. Hedged Straddles has been a source of steady profits. However, it is time consuming because of the need to actively manage the position for the whole trading day. My adjustments for this trade type are: 1) Risk allowance is increased to .72% of account. 2) Generally wait at a bit after the opening before putting on this trade in order to gain a small statistical edge that will aid in hedging. 3) Manage delta exposure according to my perceived momentary statistically based edge, and not basing my hedging strategy solely on fixed delta levels. 4) Keep track of and review my hedging decisions. 5) Continue to monitor implied volatilities versus historical volatilities and consider single name stocks for this strategy. The implied volatility has been less than historical volatility on ES for a while now, causing hedged ES straddles to have less profit potential on this broad-based index. Many single name stocks have higher implied volatility levels than historical volatility levels. Overnight Option Spreads. My profitability rate is high, with an increasing number of these spreads doubling recently. However, the amount of money allocated to these trades has been way too conservative. On most of these trades, I have yet to feel any meaningful heat. However, this trade type is not optimal for all market conditions. My adjustments for this trade type are as follows: 1) Risk allowance shall be .72% of account per trade. 2). Review the potential profitability of other strategies before committing to this trade type. 3). Lose the idea of "free roll" or "using the markets money" for a trade. I must be driven about maximizing my expectation at all times over comfortable psychological crutches. If I finish December profitable, it will be 5 out 6 profitable months of trading since inception of this account. Also, my account should also show decent outperformance of the SP500.
After reviewing option expiration schedules of various actively traded futures and stocks that have reasonable volatility and volume, I realize my need to adjust my trading patterns. Therefore, on Mondays and Wednesdays, I will trade hedged short straddles on ES, using SPY for delta management. On Tuesdays and Thursdays, I will day trade US Stocks. On Fridays, I will trade hedged straddles on high implied volatility US stocks. The option expiration selected on my hedged straddles will be always at end of the trading day in order to maximize theta decay. High gamma and the possibility of a lost trading connection is a potential risk that must be addressed in my trading size and backup communications. I generally expect to exit my hedged short option straddle position at least an hour before market close. For my overnight option spread positions, I will generally try to enter on Monday or Tuesday if I have some confidence in estimating where the central tendency of price may reasonably be at the end of the week. In the event of extreme market conditions, such as thin bids or offers, rapidly moving prices, or range expansion greater than 1.25 daily ATR(13), I will avoid trading hedged straddles or close out existing ones. In addition, on equity market down days, I will reduce my allowable maximum position by 1/3. Furthermore, as extreme market conditions may provide exceptional opportunities, I will create appropriate pages in trading platform in such a way to help me find these opportunities quickly. I must also consider longer term low risk opportunities as may be provided with LEAPs as well. On my daytrades, I will not fight the short term trend as measured by the opening indicator, even if this trend does not match my oftentimes misguided beliefs. I will use my ATR indicator, aka narrow bars after a correction for entry, and wide bars for my exit. As an alternative exit target, I may use nearby support or resistance, depending on time of day and my perceived trading day type. My stop will be a move that penetrates nearby support or resistance by a meaningful amount. From here on, I will break down my results by type of trading using common performance metrics such as PL%, RR ratio, and ROI. I will post my six month account performance early next year with a chart showing daily ending equity balance vs prominent equity indexes for the entire six month period this account has been open.
Made a little money overall today on a short ES straddle with delta hedging, a quick scalp on VXX, and on my calendar spread. My GBP, GC/SI, and missed JPY trade kept me from having a very nice trading day. I am now flat as a part of a trading reset for me. I am losing my focus and need to concentrate on risk based equity assets, in more limited timeframes, and using a smaller number of trading strategies. Upon review of my trading day, I have decided to implement a few new tweaks to my system. Having the market trade on both sides of a short straddle that expires that trading day creates management difficulties. Gamma is very high and I don't want accumulated delta exposures to get away from me. On a trading day like today, I started off with a series of negative scalps that were rapidly eating into my straddle profit potential. A day with a wide trading range with multiple runs through my short strike prices could result in a net loss for the day. Therefore, I will now use a diagonal ratio spread with delta hedging instead. More specifically, my plan is to buy an ATM SPY option (or more, as money management and margin allows) that expires the Monday after the current week and sell two OTM options that expire same day I initiate this trade type. I also gain the benefit of a currently favorable term structure. By not having to hedge deltas on both sides of the market, my potential for whipsaws and second guessing are reduced.
I have the thought that a short to medium term low in ES has or will be put in this week. The FMOC press conference is Wednesday at 1400 New York time. I believe the Fed will be responsive to economic and market risks through a more accommodative policy, even if they are not explicit about it. It looks like there will be resolution to the Federal Budget battle within a reasonable period of time. Maximum happiness would be something definitive on trade, perhaps early next year. I am inclined to sell puts or even buy calls for Friday expiration on US Equities on a sharp sell off, if any, after the FMOC press conference. Near the close on Friday, if my short to medium outlook on US equities is still bullish, I may sell some more puts or trade other bullish option strategies for next Friday's expiration.
With ES going from a nice up day to hitting 15 month lows after the FMOC press conference, it is obvious that investors were not happy with what the Fed had to say. Higher interest rates with the promise for more rate increases and a continued commitment toward balance sheet reductions seem to be the most likely investor disappointments with the Fed. It will be interesting to see the political response with potential policy changes against a backdrop of a Fed with a “monetary backbone”. I secretly hope Trump puts pressure on the Federal Government Budget Negotiations for a reduction wasteful Government spending. Yes, I wish our politicians would show us they have a “fiscal backbone”. Against global growth concerns, increased montary and fiscal responsibility would put more pressure on completing a fair trade agreement. Recession risks are rising and the financial stress of negative growth because of high Government, business, and consumer debt loads could quickly cause a negative economic feedback loop that causes monetary and fiscal responsibility to go out the window anyway. I personally don’t believe a trade agreement will necessarily keep us out of a recession. We may need an additional way to encourage idle and relatively idle assets to be invested in business expansion. There are important, if not critical environmental, energy security, food security, and space related technology based projects that large businesses or a consortium of businesses should be encouraged to invest in. Project tax incentives, project regulatory accommodations, and increased access to Federal Government procurement business may persuade enough businesses that using their profits and relatively idle and low yielding assets for capital investment may yield better shareholder value than stock buybacks. The key is for the Trump Administration to determine where a likely “decision threshold” would be for key large global companies and to provide reassurances to business leaders. Several large and meaningful projects may provide our economy enough insulation against a tougher monetary and fiscal environment to avoid a potentially serious recession. Most equities seem expensive relative to expected growth right now. Some large caps have a decent dividend yield and some protection against a trade war, such as VZ and WMT. Although WMT may see increased costs because of tariffs, I believe they will stay on top of minimizing their cost impact by seeking out additional suppliers such as Vietnam. My plan is to stay conservative, but also to have an “investor backbone” by continuing to use statistics and technical analysis on option strategies in an attempt to generate alpha in these imcreasingly volatile markets.
My account hit an all time low today from its inception in July of this year. My account is now down 3%, mostly on a short VXX play combined with my stubborn refusal to close this multiday loser. I will apply money management in the next trading session. Against an unfavorable opening, I will use a few minutes of descretion before entering a stop loss order. My one intraday trade today was profitable and was a hedged short ES straddle that expired today. There is no reason for me to risk losing money on unhedged, high delta positions, especially overnight ones. Even today, the short ES straddle premium collected was not too far from 50% of today’s range. With a daily “subsidy” of that size, it should not be too difficult to design a reliably profitable trading strategy. Over the last few days I have been reviewing the extensive material, in video format, on options trading on tastytrade.com. This free information includes long term backtests of various option trade types that includes results of multiple instruments with different trade structures. In addition, foundational reasons why certain option trades appear to have long term positive expectation are explored. Although it is hypocritical of me to point the following out, I do have concerns over their money management methodology. One must not allow a single bad trade or excessive concentration of correlated trades to have a potential negative multimonth impact on overall trading performance. Tail risk is real and inevitable over a period of time. One must avoid getting blown up over it. The swiftness of the current equity market decline has been suprising to me. This is probably related to the change in status quo over the last 9 years or so. Especially in the last five years, anyway. I have several thoughts on recent developments: 1) We have not seen capitulation, or accelerated forced selling due to margin calls yet. It seems likely we are getting close to this threshold now. 2) The US stock market does not appear to be cheap based on historic fundamental valuation metrics such as price to sales or price to growth ratios. God help us if valuations return to long term historic valuations or even to a discount. 3) Should we have a market crash, less liquidity and less retail trader participation will likely make short term trading more difficult. 4) A market crash may reduce the amount of money flows into retirement accounts next year, thus reducing a significant amount of liquidity for the brokerages and the market. 5) Businesses may hold off on capital investment, expansion plans, and hiring due to uncertainty created by a market meltdown. 6) Consumers may cut back spending over economy related fears. 7) Prominent, over leveraged financial and manufacturing companies may have liquidity problems that force them to seek bankruptsy protection. This would likely adversly affect confidence and may be seen as an additional stressor on our financial system. The common denominator to most of the above points is Confidence. Investor, business leader, and consumer confidence. The current trade and budget battles are a manifestation of long term counterproductive Government policies and our polarized political system. I see all of the influential parties as acting appropiate in either their best interests or appropiate as by institutional charter. More specifically, I believe the current Federal Reserve policies and actions, or the lack thereof, have been appropiate. The Federal Reserve primary function is not to prop up a high priced stock market. Trump’s hardline on trade and the budget are logical and appropiate in order to address long term US Government mismangement in fundamental issues such as a fair trade policy and border security. China’s stance on trade is appropiate because of the history of the US folding like a cheap suit on trade negotiations. Although all the above parties are acting appropiately, my concern is that the end result will be the unraveling of the global economy and financial system. Thus, in aggregate, one might consider all the parties to be acting inappropiately. I hope Trump tones down his rhetoric on the Federal Reserve. The Federal Reserve has been exceptionally competent over the last few years and any shakeup in leadership could very well cause a crisis in confidence that the market would not be able to take in the short term and may cause serious long term harm to US system confidence. Although I feel Trump should continue to reaffirm his position on trade and the budget, he should consider “plan B” options for both. In the alternative, maybe the world needs a financial and economic armegeddon order for them to focus on the issues on a “holistic” basis instead of political gamesmenship. For 2019, my trading will be dominated by option strategies. There is virtually unlimited flexibility with option strategies, including ones that can explain term structure inversion and that can reliably profit in most any trading environment. I will talk about these advanced option strategies in future posts after I gain more experience with them.