Karen the Supertrader - TastyTrade Hybrid Experiment

Discussion in 'Journals' started by Sweet Bobby, May 18, 2016.

  1. Maverick, I update my spreadsheet daily. I update the p&l every day. I also post all of my trades on my spreadsheet to.

    Lately I haven't had much time to post each trade on this forum. I'm taking four graduate courses this semester and it's kicking my tail.

    I am making at least one trade per day. Let me know if you have any trouble finding my spreadsheet.

    Bobby
     
    #411     Jul 13, 2016
  2. I don't think this is the "real pain" yet for your strategy. The change in the volatility in the past few days is not consider high from history perspective, you WILL SURVIVE this time and I am SURE you will come back to this board with claim of "recovery" from your daily small wins in the next few weeks. Unfortunately all of this will give you more false sense that your strategy works until one day..one day when the real sh** hit. Good luck.
     
    #412     Jul 15, 2016
  3. i960

    i960

    What's going on in Turkey right now right near the Friday close is a great example of the hidden risk these types of strategies are exposed to.
     
    #413     Jul 15, 2016
  4. Hi Bobby and all,
    I am new to the forum and I am following this thread from the very beginning as I am quite interested in this experiment. I was following Tastytrade and employing quite a similar strategy as you do but the many statements of experienced option traders in this thread got me really thinking about the risk I am undertaking.

    As everyone I was not expecting Brexit vote. Unfortuntaley I didn't bother reducing my size in advance. I was thinking I was protected through my diversification because I was selling in all kinds of assets like soft commmodities and so on. I was even so careless leaving a short put on GBP Future on. I was thinking: well volatiliy in beans won't get influenced by Brexit. Not so!
    As everyone says: Diversification doesnt help in a downmove. I learned this the hard way.

    On the morning of the Brexit day I looked into my portfolio and half of my gains of this year were erased. All deep red and volatility was exploded throughout the board no matter what asset class. This was quite a shock since I was overleveraged (80% of margin tied up even before the event!!) and margin was so elevated that I couldn't close legs of my positions and apply any of the Tastytrade defensive measures....

    That was a very unpleasant day and fortunately the Brexit vote was just a shock-like event and not the beginning of a protracted downmove with even more increasing volatility. Otherwise this could have been a very deep bite into my account. Now I am still up 24 % as of today so I should be happy but to be honest this kind of return with this strategy is plainly showing that I was taking unhealthy risk and I just got lucky.

    So I was re-evaluating and investigating a bit and this is what I found.

    First thing I found that although there are thousands of videos on Tastytrade about selling volatility in fact they do not endorse a Karen-like style at all!

    Very revealing for me was the series about the TopDogs Portfolio where Tom explains how he would manage a 250 k Portfolio. Please find his allocation below:

    capital allocation.png
    With Core positions they mean buying/selling ETFs /Futures and selling premium against them to reduce cost basis. This is their suggested basic strategy. So only 6 % of their portfolio value would go into Karen-like undefined risk trades while maintaining 63 % in cash! Sounds not too fancy, or?

    Then from another source ( the Capital discussions Board) a video that I found very interesting:



    This is about a guy "Larry" who was starting out and about to embark on a vol selling strategy. Well, quite experienced option traders were in this Trading Group and they were really honest and helpful. In the end he was talked out of his endeavour by Dan Harvey in person. Dan was (of course) recommending to trade wide butterflies instead which have significant better risk/reward profiles. Dan is offering service in this area too but it did not come across as marketing in any way and the discussion was very interesting. So this is a thing I am definitely going to explore further.

    And then a third point I found: I think this intersting article about "the system Karen" was already mentioned before:

    http://macro-ops.com/karen-the-supertrader-goes-rogue/

    I just mention it because it includes a backtest as well:

    "I went back to Jan 2014 and mechanically sold a 10 delta strangle with 60 days to expiration. For position sizing I assumed a $1,000,000 account and sold 1 SPX option per $100,000 of capital."

    I think this capital curve with this incredibly sharp declines sums it up perfectly. When you are with IB you might get autoliquidated right on the bottom and then have to watch the backlights of the following rally.

    SPX_strangles_sell_backtest-with-enlarged-equity-curve.png
     
    #414     Jul 16, 2016
    Sweet Bobby likes this.
  5. DTB2

    DTB2

    Ahh the dichotomy of tastytrading.

    1st you were convinced that you could always adjust your positions, until vol blew up you were out of margin. You were lucky to survive, others not so much.

    2nd you've now found TopDogs to be the grail. Does not seem to follow the mantra of number of occurrences and law of large numbers does it? Where did that go? You do know that "core positions" is a TT euphemism for trades that have gone against you? Then you hold them until a profit comes along. Kind of like risk 100 to make 1, hmmm.

    3rd now we're onto wide butterflies as the answer...well we'll see.

    The TT personality that said it best is gone, Slimmy. In order to make it trading you need good risk management while hitting some home runs once in a while. Do any of the strategies that you've put forward offer that opportunity?

    A lot of the TT mantra confuses activity with accomplishment. I often wonder, but never find out, how much the boys make trading since their floor trader edge was eliminated.
     
    #415     Jul 17, 2016
  6. I remember that trading group meeting. (I run it on Tuesdays at 12:30pm ET if anyone wants to attend live - its free.). I haven't seen Larry back so I hope he's doing ok with his trading. It was a really good session discussing what others had learned.

    Broken wing butterflies are nothing new. Market makers used to make a living doing 1x2s (BWB without the outer long). It's a very flexible strategy with a lot of premium to play with. Ultimately it's up to the trader to trade it so it makes money. A bad trader can lose money with the best strategies.
     
    #416     Jul 17, 2016
    Dolemite and Sweet Bobby like this.
  7. I'm new to this journal but not new to selling premium. Can't you just do a diagonal roll up on the calls? Just ratchet up until you catch up with the market or the market corrects itself, especially on the call side. What I've found from experience on the call side as soon as I have a limit of 2x or so before I take the hit and buy it back the market inevitably turns shortly after back down. Whereas when I've rolled it's sometimes taken some time but ended up correcting to get your credits back (again on the call side, I've yet to see the market crash up). I've been doing short strangles (with put protection) on the OEX since 08 and that's usually works itself out over time if you have the patience and you're not over levered. It does prove to be profitable especially over a longer frequency (months not days).
     
    Last edited: Jul 17, 2016
    #417     Jul 17, 2016
  8. Yes, quite an unpleasant day.

    I think the holy grail is structuring a portfolio with several strategies to make it immune against vol spikes instead of relying on one strategy. The core strategy should be set up in advance of all other strategies and the basic thought behind is that traders will pick the wrong direction in 50 % of cases. So the expectancy of direction-picking might be zero. But it doesnt matter as long as traders sell premium against the positions to reduce their cost basis and ultimately own them for free. Besides some time traders will become better in picking direction and start earning from direction too.

    You can combine the Core strategy as above with Butterflies as well. Or you use these inventory Butterfly trades as core strategy and sell premium against stocks with another part of your portfolio. You can buy options to hit home-runs with the speculative part.
     
    #418     Jul 18, 2016
  9. Maverick74

    Maverick74

    That equity curve is not looking so smooth anymore and to think, the VIX is at 12.42.
     
    #419     Jul 18, 2016
  10. DTB2

    DTB2

    Percentage of wins is the least important factor in determining profitability. TT pretty much says it everyday or every "study". High winning % means nothing.

    The classic selling of premiums to reduce cost basis sounds great. What if your core position is long since the markets have upward drift? You sell calls above until called away right? Stock goes down you keep the premium.

    Cut your winners short and hang onto the losers in other words. Why? To increase winning percentage. UGGH. One can't spend winning %.
     
    #420     Jul 18, 2016