Hi, I am posting here a trading Journal. In this Experience we manage an account of $50K to generate a monthly income. Whatever happened each month we withdraw at least $2500 from the account to pay the bills. If we make more we only keep $50K at the start of the next month. This experience can be simulated with a different capital until $200K by adapting positions size proportionally. Above $200K the trading approach is very different. Below $30K it’s a dangerous situation. Generating a monthly income is tough, at the end of the month you have to pay the bills and you can’t make a dent in your capital without impacting your solvency. You have to search for opportunities even in bad conditions, you can’t just wait for the market to go your way. Whatever is your level of expertise, you cannot survive trading for a living if you don’t build a stable psychology. At each substantial loss you find yourself in a state of distress and emergency prone to generate mistakes. We use options as a substitute to stocks.An option is a contract with limited risk, if you don’t short it. It’s a valuable substitute to its underlying whether it is a stock or a currency pair. You can trade it as you’d trade the underlying or you can use more sophisticated ways like being short Gamma or long Vega, not to mention its hedging power. There are a myriad of books and sites on the subject, just google it. We use options as independent traders for several reasons, the main of which are: A low cost, mainly if you buy at a low implied volatility . A time value that can attenuate drawdowns if the trade goes against you. An implied volatility value that often does the same as above, usually it rises,adding value to the option, when the underlying is falling. You can be long while being bearish (buy Puts). A calculated risk even in a case of some black swan event, or just a usual flash crash or the global mess. Of course there are many other reasons, but those above are just enough for now. Keep in mind we are not trading volatility, but a substitute for the spot. We assume here that readers have some knowledge on options pricing.
Delta Airlines- Symbol: DAL Long DAL Oct16′ 47 Call Qty: 4 Average Price: 1.96 Max Price: 2.20 Date:2015 Sept 10th 18:31 GMT +1 IV: 33% Delta: 0.51 The option is gathering participants (open interest), tech charts and analysts both see a higher price in the short term. Also we have earnings on October 14th BMO and our expiry is 2 days after, therefore the rising IV prior to earning will impact our contract the most. Being long IV this will boost our option price. Because of the rising IV boosting the option price, we can hold the position until the day before the announcement. If the stock price doesn’t move, the rising IV will compensate for the time value loss (we pay time value with implied vol). We are looking for $50.50 and we have the 200 DMA as a short term support and liquidity cluster (big players need liquidity to enter the market). This trade which would’ve been a no brainer 2 months ago is risky now. Anything is risky in the current market. That’s why our position is rather small ;we may lose $839 but we do believe that if the SPX settles down, DAL will move north fast. Risk/Reward: There’s no such a thing in the real trading world, the risk we take is the price we paid. Entering ahead of next week FOMC decision on rates is risky.
Good question. The workflow is optimized: A shortlist of high probability winners (techs positioning, analysts expectations, sound sector, clear horizon...) Being informed of what is driving the prevailing sentiment and anything looming that could impact the SPX/VIX. The stock picking can be largely automated (scanner) and fine tuned according to your market expertise. Having a grasp of VIX movers and being updated on the news front is more related to your knowledge in macro economics, politics... and is fed by your daily readings. On average it's more or less 1 hour a day and 4 hours the week end, more important is the distribution during the week day.
Lululemon. Symbol LULU Oct 55/47.5 Bull Put spread Qty: 5 Average Price: 2.40 Credit Max Price: NA Date:2015 Sept 11th 19:40 GMT +1 IV: 42% Delta: 0.35 The stocks collapsed 17% yesterday because of earnings announcement. It’s way overdone. The EPS were slightly above expectations but the outlook not as expected. Lulu is among the best players in its field and the big sell off was induced by the current nervousness. Already influential analysts like UBS and Deutsche Bank reiterated their coverage with a bullish tone. The price is now very low and it’s a good opportunity. The strategy is quite simple, we want the price to stay above $55 that is $0.70 from where we are and where we are is low compared to its valuation ($68.59) after earnings. We sold ATM puts but not much and covered with OTM, a simple Bull Credit Spread. We have IV with us that is still high and we see it falling faster after next week FOMC meeting. Risk/Reward: we are selling premium hence the profile is risky (2:1). We always consider the maximum loss as our real exposure, in this case $2500. FOMC meeting due on Thursday can really threaten the position if they decide to raise rates. This hike in rates was priced in before the Chinese devaluation, but now it could be seen as a surprise by some participants .
Let's see. To make things transparent, by the end of each month I will post the account balance (fees included) with the P&L of each trades and the $2500 withdrawal. You can see that I give the exact time at which the trade is opened and I'll do the same when it is closed. We will start each month with that new balance without never exceeding $50K
What are we waiting for ? We won't open any position before the FOMC meeting (due on Thursday) to know if the Federal Reserve is whether raising rates or not. The whole financial world is waiting. This rates hike was already priced in (discounted) by the market, but since the Chinese Yuan devaluation many participants anticipate the Fed will not move; if they do it can surprise many. In the current SPX upmove only techs are involved, fundies, specs and real money (institutionals) are sitting on the sidelines.