Prompted by Overnight's OCD , let's recap why prefer FOPs over FUTs. You will probably remember from other public illustrations (decades ago) that I started working with futures (and actually, whatever instrument I could put my hands on). And trading futures with this scalping/hedging approach can be done quite similarly (possibly with specific adjustments depending on the traded instruments.) We have seen that so many times and the general outcome is often the same. Generally, you make money on instruments where and when there is, say, a prevalence of "horizontal development of volatility", over "vertical" movement. In fact, we have also seen that the best instruments are commodities (CL, GC, NG, ...). We have also seen that the common problem can be the extension and duration of drawdowns, which not everybody, and not every fund, can handle, due to the huge range of some of the instruments. For various reasons, FOPs allow the resolution of most concerns. For my purposes, I like to think intuitively of the FOP mostly just as a "modified version" (dampened) of the underlying, that I can choose from a bi-dimensional matrix, where I can freely select the level of risk (e.g. selecting expiration, delta and vega, etc.) which I cannot easily modulate with FUTs (apart from manipulating the position) and where there is also a constant "force" pushing towards zero (imagining an infinite rollover and "information transfer"), which along with the continuous "stop-loss recovery" mechanism is essentially what imprints a positive drift to the PNL curve. There are also several other aspects, like ease to modulate margin usage, by switching expiration and strikes, and the short duration of DD, which make the use of FOPs instead of FUTs much more viable for any investor. btw, today we have touched a new record high: 253K, right now about 242K:
ES continuing its rally: We have reached a new record high of 265K, currently 264K (266 days elapsed) with 18.8K commission: The "red" instruments are obviously the (high vega) long legs of our "protective structures", which we have discussed before. Note that even if ES is momentarily rallying, overall the market still declined significantly since we started this trading session (31 Jan 2022).
If you think about it... if one starts up by defining those (long-term) "protective structures" (or whatever you may like to call them) that we have seen so far, while scalping/hedging algorithmically on shorter-term options, it is actually even better if the market declines a bit or it does some bearable crash because we have some concrete chance to be able to make $$$ from the "protection" itself (the "long leg"). In fact, this has already happened in this illustration, where actually the "long leg" provided the layer with the highest profit. You can see that in the following picture, representing the various layers: In the meantime, the PNL has gone up a bit, to 287K, currently 284.5K. We started with a 2M fund and have been trading for 267.8 days. Comms: 19K. Current fund usage 79%.
We end this exceptional week with a new max value for the PNL, 323K, after touching 325K. Duration: 270 days elapsed from the start with 2M. Commissions 19.4K. Current fund usage 88.5%. All current instruments (59 layers): (the 2 red ones, are the "long legs" (high vega) of our "protective structures".) Overall view of the market during our trading session (including rollovers): ES FUT 202212 GLOBEX 50 E-mini S&P 500 [ESZ2, 495512551, mult: 50]
After this nice rally, we must prepare for the next DD. We do not actually care, about what the market is doing (remember, absolutely no prediction here: we just do what is "necessary" to stay safe), we just open new "protective structures" when there is a large enough move. This is obviously at the folio manager's discretion. A move of 15% - 20% may fit most tastes and risk attitudes. ES FUT 202212 GLOBEX 50 E-mini S&P 500 [ESZ2, 495512551, mult: 50] current PNL (74% fund usage): So it may be time for a new one. Recall that the last 2 "long legs" we enforced lay at 3000 and 3500. Currently losing about 11K each. But waiting to become "time bombs" (relatively high vega) if the market falls
Since ES reached 4000, here we go: +7 ES FOP 20230818 4000 P GLOBEX 50 E-mini S&P 500 [EW3Q3 P4000, 574680266, mult: 50] -45 ES FOP 20230616 2000 P GLOBEX 50 E-mini S&P 500 [ESM3 P2000, 561102564, mult: 50] -35 ES FOP 20230616 2500 P GLOBEX 50 E-mini S&P 500 [ESM3 P2500, 495666632, mult: 50] -20 ES FOP 20230616 3000 P GLOBEX 50 E-mini S&P 500 [ESM3 P3000, 495665910, mult: 50] ES FOP 20230818 4000 P GLOBEX 50 E-mini S&P 500 [EW3Q3 P4000, 574680266, mult: 50] ES FOP 20230616 2000 P GLOBEX 50 E-mini S&P 500 [ESM3 P2000, 561102564, mult: 50] ES FOP 20230616 2500 P GLOBEX 50 E-mini S&P 500 [ESM3 P2500, 495666632, mult: 50] ES FOP 20230616 3000 P GLOBEX 50 E-mini S&P 500 [ESM3 P3000, 495665910, mult: 50] ( - ( 339.75 * 7) + ( 12.25 * 45 + 27 * 35 + 61.25 * 20 ) ) * 50 = 17150 ES FOP 20230818 4000 P GLOBEX 50 E-mini S&P 500 has vega = 13.67.
Today we are reaching a new max of our PNL: 341K. This is happening even though ES is slowly turning down: ES FUT 202212 GLOBEX 50 E-mini S&P 500 [ESZ2, 495512551, mult: 50] This is due to the fact that now we are "full" of those "protective structures" we have been slowly building up, which, in fact, may make more money on the way down (up to a certain % of move) rather than with ES going up, in which case we just get the decay (which is not small anyway). Clearly, if the move down becomes too big, we need to intervene at the folio level, by liquidating the short legs or activating the automation on those to scalp/hedge and lower the margin requirements.