This will be a real money trading journal focusing on positive gamma option trades, mostly using spreads. My focus will be on finding bullish positions on single names. As my overall exposure increases, I may offset some of my positive deltas using OTM ES put butterflys on ideas to improve risk to reward and dampening potentially excessive overnight equity swings. I hope to confirm and compound various edges into my trading plan. While I’ll try to remain fairly conservative, I do not have a set daily or weekly risk management loss amount. A account blow up will be defined as loss of 20% of starting equity as of October 1st, 2020, or a loss of about $8000. If I “Blow up”, I will stop trading short term strategies using real money for at least three months. This journal will also note the more extreme equity swings that occur and will explore ways to mitigate them.
No option trades today. Did make 9.5 cents on long SI(1000) on Monetary Arb and 13.00 points on short MES on Risk Environment Arb for up $157, or .39% of account value on the day. I consider the US equities market in a uptrend, but with questionable “Tape” action. Will probably sit out tomorrow’s session as I have a to do list built up, although I may buy an ES OTM put ‘fly if ES breaks to the downside in the overnight session.
Both, although I shouldn’t have said “Tape action”. I ment to say the relative performance of risk based assets leads me to think a correction is in the cards.
Here are some examples of the relationships between instruments I look at when looking at the lens of “Risk Environment”. Other realtionship lenses I look at are “Economic”, “Monetary” and “Geopolitics”. Top of mind, in no particular order, I look at the relative performance of silver to gold, with silver outerforming gold being a positive indication for willingness of traders to take on risk. Nasdaq performance relative to SP500. High option volume on Nasdaq based underlyings versus Nasdaq itself. Specifically, I look at average option volume greater that 30,000 contracts on stocks over $80.00 per share. And so on. I am trying toget an early read in the risk environment in an attempt to anticipate related money flows. SP500 performance relative to Crude and Copper is what triggered my ES short sale this morning. ES was around 4sd to the upside on the 30 minute, with crude and copper going beyond 4sd in the other direction. I normally don’t jump a minor deviation, but today seemed extreme and worth a try. This is an example of looking through an economic based lens. Noticed how CAT and BA performed relative to ES today? On my single name option trades, I will post my entries and outline my thesis and trade management plan. Again, my universe for these trades consists of higher beta stocks over $80.00 per share with average daily option volume greater than 30,000. If I have a particularly strong thesis, I may venture outside these parameters.
Account value up 1.74% on long ES 2-3-1 put spread, since closed. I am flat except a $200. lottery ticket ES put ‘fly entered near the close. My scalping around my put fly had a rough start, resulting in early scalping losses beyond by partial hedge costs. Later on, my scalping came on strong, netting about $70. overall on the day. Still have some work to do on my scalping strategy as I ended up chasing in the no man zone. Good weekend to study today’s trading and reinforce my scaling entry and exit strategy. I over estimated the impact of Trump’s Covid diagnoses would have on the market. Notably, NQ underperformed ES by about 200 basis points, suggesting rotation and or less risk tolerance. Trade ideas next week will revolve around new stimulus ideas, monetary concerns, economic concerns, and earnings. If Trump’s condition worsens or he dies, I suppose the market would sell off quickly, but bounce back sharply after selling abated. I have no ideas on how to price such an event. While I am bullish on upcoming earnings reports on high profile tech companies, I am leaning towards fading any big gap ups on outlook concerns related to the economy. Then again, I must not forget the power of the stimulus wand.
I’m using MES to dynamically hedge my option position because it is not practical to actively trade a 3-legged option position. However, why should I sit through periods of perceived temporary negative expectation with full exposure? I use scalping to adjust my exposure according to my current confidence in the trade. For example, my ES 2-3-1 put fly had about 43 deltas of exposure. I was happy to have about 20 delta exposure when I’m not actively monitoring my position. However, since I had time to trade today, I actively managed this exposure from full exposure all the way to 0. To determine my scalping performance, I compare my actual net performance on the day versus a calculated hedged only position to see if I did better managing the trade or not. The other reason why I partically hedge my option positions is improving reward to risk according to the specific way I manage the trade, especially overnight. On overnight trades, my stop loss is an adverse move of the previous day’s high or low getting taken out against my position and a threshold amount beyond the RTH opening price. On trades that are not stopped out, they are likely to last several days, giving me the benefit of significant theta decay on my typical short term spreads. I see partially hedging my deltas as improving my reward to risk under such a option spread trade management scheme.