You lost 1%. Why continue when you don't trade large enough, regardless of edge, to beat tbills? I once had a year, relatively early-on, where I spent $48K in comms and ended with a yearly PNL of $0.80. However, var was large.
I agree, thanks. I actually “legged” into the double calendar. From now on, I will only place short term OTM, .12 delta calendar spreads using puts when having a bearish outlook on ES. When I have a bullsh ES outlook and IV is still reasonable, I will sell ES straddles of 6 to 8 week in duration by selling the .37 Delta put and selling the .12 delta call. I will manage my deltas when tested. You said you are doing box spreads. Is this in ES to take advantage of skew? By the way, please take me off of ignore. Unless, of course, you are only a dish it out but can’t take it sort of guy.
A box is a conversion using two strikes in lieu of a conversion arbitrage with shares. A conversion is long shares and the short synthetic at edge (ostensibly). A box is the long and short synthetic. A long box is long at x, short at y. The short is long at y, short at x. There is no method by which one can arbitrage skew... or there wouldn't be any skew. I didn't know that you legged it. The problems with double calendars are many. One of which is that a narrow one-lot double calendar (combination; call and put) is simply a synthetic two lot call OR put calendar. IOW, it's analogous to choosing a two lot 400/402.5 strangle instead of a one lot 400 straddle. Less egregious to go wide as you did, but you'll generally never be happy with the payoff. Also, you risk trading outside either strike. Also, they are inefficient use of capital w.r.t. gamma and theta. You accused me of pimping my kid's account under the absurd notion that I'd want my teen to manage OPM. I don't mind taking shots, but I don't abide by libel. TBH, I don't care a lick if you blowup (obviously unlikely), but I cringe when I see combo-calendars and must warn people to stay clear.
I personally prefer to be called out when I make a mistake. Especially in an open forum as it is better to get it right, if not the first time, then eventually, rather than repeat the same mistakes over and over again. I have made other mistakes in my journal and unfortunately have not been called out on them. At least when I get new information, I apply it. I appreciate your efforts in providing specific information in this and other threads. For what its worth, I rarely go out of my way to prove or validate non-trading points on a trading website, if you catch my drift. We all are probably better off when we focus on trading and focus on making comments that are appropiate to trading. A quick “I disagree with your trading idea because...” is more valuable for everybody than ad hominem attacks such as “Your parents must have passed along their bad DNA to you”, etc. If the recipient rejects constructive criticism, it may be best to move on. I am getting beat up on volatility contraction and am down about $300 from yesterday on my double calendar spreads as I write this. At this point, I will need a two sigma intraday move in an hour and a half to recover.
My account is down .6% for the week as a result of a narrow range day on Friday and decreasing implied volatility for my double calendar ES spreads. My very good entries on these trades were not enough to save me. I never acted on my idea of taking some profits off the table on Thursday. Mr. Greed was not my friend again. Looking into next week, I see increased chances of a wide range day in either direction versus the week gone by. Negative earnings or economc reports will likely stoke growth fears or a Federal budget or China trade agreement will likely extend bullishness. With the Federal Reserve moving towards a neutral stance, or as may be implied by bond market action, a bit accommodative, bullish traders have one less thing to worry about. Of note, PFF(Preferred stock ETF), JNK(Junk bond ETF), and EMB(Emerging bond ETF) had a strong week probably reflecting reduced investor concerns of a brewing financial crisis. The collapse of crytpo currency prices has taken a toll on demand and prices of graphics cards. I presume there will be spillover into related computer hardware that support of blockchain mining. NDVA and other descrete electronics manufacturers will likely see tough earnings comparisons for the next few quarters. NQ had weaker relative performance than ES on Friday possibly reflecting these concerns. I have concerns that many other US companies, especially transportation and hospitality companies, will have a hard time meeting or exceeding year over year analyst expectations because of slowing freight traffic growth rates since the July 2018 peak. Given my outlook above, I will look to buy short term options to limit risk, yet be well positioned for an outsized gain that a daily range expansion would provide. In addition, I may buy some short term single name butterfly spreads on earnings plays going forward in an attempt to benefit on post earnings IV crush.
In my preparations in persuing a new business venture, I am increasingly feeling the effect of technology is having on the labor market. Certain aspects of my new business idea such as loan origination, is inevitably going to be obsolete by artificial Intelligence(AI) and disintermediation. Technology is being increasingly used as a weapon to lock out potential competition or do it yourselfers as been seen with certain commercial vehicle dealers and repair shops. Although anyone can technically buy the system to efficiently diagnose complex electronics and other commercial vehicle issues, the price of this equipment and software is prohibitive for anyone who is not doing high volume. Certain commercial vehicle manufacturers and dealers effectively control this diagnostics equipment because can protect their code through encryption and ridiculous licensing requirements and fees. I have been attending several business opportunities and networking / lead exchange meetings. Some meetings focus on creating trade groups that can help bring in additional business for participants thus giving each staying power in an economic downturn and thus a competitive advantage. Other groups look to exploit some of their own members as well as members of the public by using their superior knowledge and lack of ethics for outsized short to medium term returns. Yet other groups are looking to create better investment and business opportunities through disintermediation and creative, but legal application of existing rules. Now that the foundation has been laid, let’s try to visualize the likely social, labor, business, and investment implications for the future as AI and social systems evolve. Financial institutions, starting with banks and stock brokerages and increasingly insurance companies are going to feel the effects of disintermediation through increasing person to person lending and self-directed retirement account holders investing in real estate, businesses, and secured notes. I am using the term person to person rather than peer to peer because the people in the transaction usually have met face to face before completing the transaction. Several retirement accounts of different owners can participate in the same transaction together, thus giving some scalability among friend, etc. Negotiated interest rates on secured real estate tend to be roughly 400 to 600 basis points more than a prime loan from a bank. However, there is usually more privacy, less work, and a much faster closing of 2 days versus the 45 days at some major banks. Closing costs for person to person lending may be lower as well. There is a nominal attorney fee to draw up the note, but not anything like the overall cost cost of an online peer to peer intermediary. Hard money lenders tend to be less restrictive and faster than banks, but tend to have high up front costs. The interest rate differential between what banks pay for deposits and what they charge for loans seems unsustainably high in a connected world that also has credit unions. The person to person participants I’ve talked to seem to feel a certain sense of community with their group versus working with a bank. Too many managed investment products by insurance or other investment companies have suffered poor returns from high fees and or weak invesment selections and allocations for many years. Money flows away from these type of assets will likely increase as the word of viable alternatives gets around. There seems to be increasing utilization of an intangible asset class: Sphere of Influence(SOI). SOI is the people you know and can influence to make a decision on a product or service. It has real value because many high performing salespeople will exchange their time and knowledge in an attempt to gain access to your sphere of influence. The information they provide is usually leading, if not cutting edge because it has to be in order for them to have any hope of being allowed access to your SOI. There are fairly frequent examples of this information sharing seen in free or low cost classes on eventbrite.com. These classes cover subjects such as the importance of and how to maximize one’s credit score, how to better utilize various forms of technology, or how to become more knowlegeable in managing one’s money. Many, but not all, of these classes are taught be leading industry professionals. Although certain aspects of AI are scary, especially when used by business in an attempt to extract unreasonable profits, people adapt. They adapt either because they have to or they adapt for a potentially profitable opportunity in helping others to adapt. We have seen Uber upset the expensive taxi near monopolies. We have seen Walmart disrupt much of the retail industry because many consumers want to pay the least possible for commodity type items. We have seen amazon disrupt online businesses because of their relatively easier and streamlined interface as well as cost savings. Craigslist.org and other websites have disrupted print advertising and the rental market by giving free or low cost access to broad market advertising. I see money center banks as the next in line to feel the power of the internet and increasing competition. I expect social and effective communication skills to become even more important for one’s standard of living in the future. It is through networking, cooperation, and the power of shared knowledge that the consumer will be able to stay ahead of those businesses and political powers who use technology and our own data to take unfair advantage of us. The one thing that may not change too much is intraday trading. It will probably remain the chaotic mess it has been over the last few years and take the money from participants like myself who are either too slow to adapt or remain in that time frame. Attached below is a link to an article I read recently on AI: Will Robots Take Our Children’s Jobs? https://www.nytimes.com/2017/12/11/style/robots-jobs-children.html
Not much trading activity this week due to many meetings and exam studies. It was another disappointing week performance wise that had no option trades. I lost roughly 1.5% of account value on weak trade ideas. Late Friday, I put on a gold / platinum spread on ideas of potentially less geopolitical uncertainty as the China-US trade agreement gets worked out, better economic outlook helping platinum as an industrial metal, and relatively the higher prices of other sustitutable platinum group metals. Shorted 3 (30 oz.) of MGCJ2019 @ $1288.90 / Bought 1 (50 oz.) of PLJ2019 @ 802.10 for a difference of $486.80. My initial stop is a wide $30.00 on this position trade. If not stopped out in a few days, I will likely end up tightening it. My major concern at this point is Palladium has been in a strong long term trend for a while and is now showing a big range expansion. This may indicate a blowoff top either has been reached this week or we may be near one. if so, palladium may be able to pull the weaker relative performing platinum down with it. I so want to explore option strategies in depth after looking at term structures and volatility skews of various financial instruments. I believe there is a edge when implied volatility(IV) is greater that historical or realized volatility using appropiate short premium strategies. There may be a useful edge when nearby expirations IVs are greater than distant IVs when using calendar spreads. And finally, there may be an extractable edge in volatility skew through ratio and diagonal spreads. So much to learn, backtest, trade, and so little time. I am learning the various methods that real estate and note investors are able to obtain outsized and tax deferred returns. Although I am aware of several methods, one method I will outline here is what I’ll call “FICO arbitrage”. Basically a real estate investor will buy a low priced property and finance it at a low rate using his strong credit score. Then this investor will offer the property either as a lease option or even a sale with seller financing depending on favorable, usually non-bank, lender terms and state laws to someone with weak credit. In many cases, the overall payments of the lease option or mortgage for the benefit of the seller are priced at or lower than nearby rental rates. The investor typically gets $5000 down, which returns some of their cash back and a higher interest rate on the financing they provide to the buyer. The payoff period is typically five years, allowing the buyer enough time to obtain more permanent financing if desired. The sources of profit in this transaction are from increased realized sale price of property solely through the easier financing terms and the favorable yield differential between investor’s mortgage and buyer’s mortgage. Overall return is further enhanced by the reduced net investment amount because of the new buyer’s down payment. Net yields of over 100% are not unheard of, especially when new buyer pays off loan early, usually via sale or refinance. The obvious risk is if the new buyer does not make their payments. Good collaterial and a strong manager can mitigate this, sometimes to the extent of increasing returns by releasing the buyer from his obligations and selling the property to a new buyer. This transaction can be done within a self directed retirement account thereby gaining significant tax advantages if certain rules are followed. Leveraged discounted notes will be explored in detail in future posts under the title of: “liquidity is king during a recession”. The trade news between China and the US seems favorable. Even if a deal is reached, we are not out of the economic woods yet. Many economic and business numbers for December 2018, March 2019, and June 2019 quarters are likely going to have a tough time beating their prior year comparisons. Freight volumes of various modes is decidedly weaker than the July, 2018 peak. At least business and investor concerns should be lessened. Combine this with a increasingly supportive Fed, the equities markets may settle into a broad trading range or maybe even a little better. Disclosure: This above information is for educational purposes only. No product or services are offered by me. Anyone interested in more information should contact appropiate industry professionals.
Just completed a three day online seminar that covered real estate, note, and tax deed investing. I was reminded of a quote by Morpheus from the movie “The Matrix”: “What you must learn is these rules are no different than on a computer system”. “Some of them can be bent; others can be broken”. I am not talking about violating legal requirements, rather it is the status quo in how most people go about things. Whether it is trading, real estate, or notes it pays to identify mistakes and system inefficiences in order to exploit them. Capital allocation and risk management, as always, have their place in whatever investment or risk taking activity. As our financial system becomes more under the influence of AI, those who have multiple disiciplinary knowledge, creativity, and willingness to take on risk should have a major advantage over those who are slow to adapt. There is a real estate investor who searches for listing information deficiencies on the multiple listing service(MLS) that can cause a property to not sell. This investor will do his research, develop a plan, and then approach the seller with a an offer. This investor is exploiting a system weakness that is caused weak communication and followup between the MLS programmers and the the MLS real estate broker representatives as well as a lack of diligence on the part of the busy real estate agent. This investor has discovered enough of these opportunities that he categorizes them by type. Another inefficiency involves real estate owned(REO) by banks. Real estate owned by a bank is usually the result of a failed loan. Most banks will often sell their REO at well below market rates, even accounting for condition. Further, many times they put unnessary restrictions that will reduce their pools of interested buyers. Basically the bank is following legal advice of their attorneys without sufficient consideration to market impact. It seems that legal risks are overweighted and the net expectancy of a transaction is not usually considered. Banks and other note holders have been known to sell their non-performing notes at a discount of 25 to 75%, depending on property condition and local market conditions. A real estate investor with superior market knowledge will then cherry pick the best opportunities. By not being greedy, these investors can get the note performing again without foreclosure, a short sale, or deed in lieu more than 50% of the time. In the case where the occupants need to be evicted, there is usually enough room between the value of the property and the note’s value to come out at least whole. One of the presenting private mortgage lenders in this weekend’s seminar showed some scary statistics that showed increasing consumer nationwide debt levels and still historically high debt distress for this stage of the economic cycle. Furthermore, a fair number of large mortgage companies have eased their underwriting requirements to accommodate “non” prime borrowers for hedge fund yield chasers. They no longer use the term “subprime” much, apparently. More specifically, according to the presenter, mortgage loans in distress nationwide is over 3%. For other types of credit including auto loans and credit cards, the number of accounts that are “under distress” is closer to 6%. Consumers have yet to reach the pre Great Recession lows in credit distress. The takeaway is consumer debt levels are high and consumer debt performance levels have yet to fully recover during this second longest economic growth cycle. A recession in the US could cause another serious financial crisis. All in all, economic risk seems high, but central banks and other policy makers seem to realize this. Because I am underinvested right now and don’t know when we may go into recession, I am going to take on more risk by selectively investing in higher yielding opportunities that seem to meet basic fundamental considerations. In addition, I will look to increase my knowledge base and network.