Progress Report 33 Bearish Wolf Small update today. I spent much of the time today looking at two things: option pricing and momentum. To learn about the theory of option pricing, I am going to tackle the book by Natenberg, but I felt that some structure was important. For this, I found a course in coursera which will be the basis from which I will come to master option pricing. Regarding momentum, I continue to make progress on the book ‘The Visual Investor’. I am reading up on some of the techniques and indicators that they propose, and testing them on time series with TradingView. Moreover, I am also starting to dip my toes into trading momentum with more quantitative models, such as machine learning. Today, I just came across some videos implementing TensorFlow to implement a momentum trading strategy, for example.
Progress Report 34 Bearish Wolf I mentioned yesterday that I would be reading up on the book by Natenberg. Well, no, I decided I am not doing that. I am taking it as a reference, for sure, but I am taking a shortcut to learn option pricing: just reading up on lecture notes. I have been lucky enough to find lecture notes that summarize the Black-Scholes model and the greeks. And that is everything I need. I was to embark in a journey of reading books of 1.000 pages each but gladly I realized that I could could achieve my goals faster. Time Crushing: Estimated time to read Natenberg is around 50-80 good hours. Estimated time to read the lecture notes and supplement that knowledge with Natenberg? About 5. So let’s be lazy/efficient and implement only the actions that actually make sense to bring us to our results. Let’s never do things just ‘to be busy’. So this was the focus of today: downloading those lecture notes and rushing through them. Around 40% done already. Some other stuff I have been up to is mental Mathematics. I will eventually put up an entry concerning only these strategies. For a sneak peek of this, scroll to the end of this blog entry. Moreover, I am committing to at least one trade per week. And the winner is the following one (as suggested by another trader): Monday or Tuesday if Monday is a holiday, between 3:30pm – 3:57 pm, sell to open (naked) 1 contract (100 shares worth) of UVXY ATM. Besides this, I need to start thinking about resetting my paper trading account to mimic my real future portfolio. What I mean with this is that currently I have a paper trading account in IBKR with around $1.000.000 in buying power. My personal buying power is different than this, so I need to open another trading account that would be a ‘real-life’ simulation of what would happen with a portfolio of my size, with the trades that I do. Following is a small draft of the blog regarding mental Mathematics that I will eventually put up in my blog. For now, ignore all examples, as they should be rendered in LaTeX, but I have not figured out how to do that just yet in HTML. For a better view of this, go to bullishwolf.wordpress.com Multiplication For notation purposes and explanation purpose I am going to use the terms multiplicand and multiplier. The one that is being ‘multiplied’ is the multiplicand and the one ‘multiplying’ is the multiplier. In low orders of magnitude, this does not really matter. e.g. in 7*6 it does not really matter what multiplies what, the answer is straightforwardly a 42. But in higher dimensions, such as with 34*2, it does matter what multiplies what, since you would want the multiplier to be the easiest one to multiply the other. Here, for example, we would one 2 to be the multiplier to 34 as it is quicklier to calculate 2 times 34 (34 + 34 = 68) than 32 times 4 (2 + 2 + 2 + … + 2 = 68). Of course, because of the commutative law, both answers yield the same results, but the former is easier in your head. Use the 5’s to your advantage. There is a very easy way to multiply any number by 5. It goes like this: Make five the multiplier. Take the multiplicand and multiply it by ten, i.e. just add a zero at the end. Divide this number by two. This is your final answer. Since divisions by two are most of the times easy to carry out, this method saves you a lot of the trouble going through all the motions of the multiplication. Here is an example: $$354 * 5 = 345*\frac{10}{2} = \frac{3540}{2} = 1770$$ Use the 11’s to your advantage Every multiplication by eleven can be carried out in seconds. The trick is as follows: Make 11 the multiplier. Anchor the initial and the last number of the multipliand. These are also going to also be the initial and last numbers of your final answer. Sometimes you will have to add one to the initial anchor, but we will come to that later. Starting from the right of the multiplicand, sum each two individual consecutive numbers. If the sum is one digit, this is the next number of the answer next to the last one (starting from the right). If the sum is two digits, the last digit is the next number of the answer, and the initial digit you carry over to the next sum. Do this algorithmically until you get to the first digit. Couple this with the anchors in step two and you have the answer. Sounds a little bit more complicated than what it actually is, so here is an example: $$\text{1. }423*11 \ \text{2. }\text{Anchor the 4 and the 3 } \rightarrow 4…3 \ \text {3. }\text{Start summing each two consecutive number from right to left:} \ 3+2 = 5 \ 4+2 = 6 \ \text{4. } \text{Couple these sums with the anchors: } …56…\text{ & } 4…3 \rightarrow 4563 \text{ (final answer)}$$ A more complicated one: $$\text{1. }6827*11 \ \text{2. }\text{Anchor the 6 and the 6 } \rightarrow 6…7 \ \text {3. }\text{Start summing each two consecutive number from right to left:} \ 7+2 = 9 \ 2+8 = 10 \ \textit{ keep the zero, carry over the 1} \ 6+8=14 (+1) = 15 \\textit{ keep the 5, carry over the 1} \textit{ to the initial anchor} \ \text{4. } \text{Couple these sums with the anchors: } \ …509…\text{ & } (6+1)…7 \rightarrow …509…\text{ & } 7…7 \rightarrow 75097 \text{ (final answer)}$$ Also works for simple two digits: $23*11 = 253. $ Multiplying Numbers With Same Initial Digits and Last Digits Summing Up to Ten (2X2 multiplications). Let use introduce a new operator, the concatenator $\operatorname{CC}{ x,y }$. This operator does exactly what you would expect: it just concatenates two numbers, one after the other. e.g. $\operatorname{CC}{ 12,25 } = 1225$. We will see shortly why this is helpful. Now, for every multiplication of two digits by two digits, starting with the same number (e.g. 34*36), and for which the last two numbers sum up to ten (e.g. 4+6=10), there is a fairly straight forward way to compute the answer. Multiply the initial number by the the number right above it. Multiply the last digits by each other. If the result of two is double digit, concatenate the results of (1.) and (2.). If the result is double digit, concatenate the result in (1.) and (2.), but with a zero in between. Here are two examples: $$3634\ \text{1. }\text{Multiply 3 by the number right above it:} \ 3(3+1) = 12 \ \text{2. Multiply the second numbers by each other:} \ 6*5 = 30 \ \text{3. } \text{Since the result of (2.) is two digits, we just concatenate these results together: } \ \operatorname{CC}{12,24}=1224 \text{ (final answer)}$$ $$5159\ \text{1. }\text{Multiply 5 by the number right above it:} \ 5(5+1) = 30 \ \text{2. Multiply the second numbers by each other:} \ 1*9 = 9 \ \text{3. } \text{Since the result of (2.) is one digit, we add a zero in between} \ \text{and concatenate these results together: } \ \operatorname{CC}{30,0,9}=3009 \text{ (final answer)}$$
Progress Report 35 Bearish Wolf Well, would you look at who lost his shirt today: me. The bear spreads in a bull market. Yea, that was definitely a perfect idea. Two main things things learnt from this: I was estimating an x% move on the securities I was betting on, both on the upside and on the downside. However, I realized that these bands around the price were spread too thin. It was based on guesswork, but I can definitely do better in choosing the strikes by either technical or statistical analysis. Now, this is a trade-off: the more aggressive the bet, the more the leverage and viceversa. On the ZM position, I had deltas of 77 the underlying. That is, for every euro increase in the underlying, my option increased/decreased approx. 77 euros. More "conservative" bands would have given me smaller deltas. I do not why I am being bearish in a bullish market. I was hoping that Thursday down down would happen again when the trend is: up up. This was, I think, a revenge trade. I lost money on my bear spreads before, and I came for revenge that I did not find. I opened a trade on the UVXY as I said I would do, I trained some mental Mathematics, I continued learning about technical analysis, and doing some exercises in TA with my tickers. Plus, Black-Scholes models for option pricing. I am almost done, gonna finish that course module tomorrow. Everything reported is paper trading.
Progress Report 36 Bearish Wolf I learned today from yesterday, closed all bearish positions and opened bullish on the UDOW and SHOP. UDOW is leveraged 3X the DJI to be able to get some profit out of those basis points movements of the index. I entered this positions with only a call. I was reading up this morning on the difference between bear spreads and simple long puts and long puts make a lot more sense, at least for the purposes I have in mind. I moreover chose an expiration far away (November) so that I do not have to worry too much about short term movements. Strike price was ATM, at around 3 hours before the time of writing this report. I begin to feel more confident with charting, with options and with the broker platform. I guess it makes sense that I feel more comfortable because I know a lot more than at the beginning. After all, I have been consistent in clocking in the hours to learn about options trading. And actions begets results.
Progress Report 37 Bearish Wolf I focused today further in the Black-Scholes, and I can proudly say that I understand most of the basics of it, including the greeks. Everything was incredibly easy to understand, and I think that this comes due to experience having traded (paper) options for a bit of time already. It is a constant learning process, but at least the basis has been set, and now I can focus more and more in execution. Same with visual investing, I am starting the see the clearing in the forest, allowing me to focus more on execution to eventually single out what really matters. Some updates regarding the positions today: SHOP gained a lot. However, since the call is far out in maturity, the percentage increase was not that aggressive. Lesson for later: choose options that are more suited to your time horizon. At the beginning I chose to early of an exercise, with SHOP it was too late. DJI is down, which does make me doubt why I chose this index in specific. The NASDAQ, for example, showed way better momentum. The put I wrote on the UVX is earning some money. All in all, a good day.
Progress Report 38 Bearish Wolf trading June 18, 2020 1 Minute These progress reports are getting shorter and shorter. Thing is, the main things that I am doing in now is deepening my knowledge on the basis on what I have learnt the past weeks. So there is nothing "new" to report, but plenty of work going in the background. Anyhow, today I was able to check off one of my tasks: Finish reading the book "The visual investor" (deadline: 22-June). This is active reading, whatever I see in that book, I am going to try something similar in TradingView. This is done, and it was indeed a good introduction to technical analysis. What I will be doing now is refining that knowledge and choosing the indicators that will be my tools. They should not be more than 5, at most. New goal is thus: Make a list/summarize your most important indicators and deepen your knowledge regarding them. Regarding my positions, the UDOW continues to lose. Mistake on my part: and I did not cover my loses on that option, so it is down 90%. Luckily, exposure to that one was minimal. Still, a mistake. However, I have learnt now how to put stop orders in my portfolio, so I do not have an excuse from now on to accept these large losses. I also learnt how to put stop trailing orders, which are covering the incredible upside I am seeing in the SHOP put. Today only it was up 20%. These could have been so much higher, though, if (1) I had chosen a shorter maturity and (2) I would have chosen a put DITM. This last observation, however, comes only from my recent understanding of the greeks. But this is definitely something to keep in mind for next time. Finally, the written put on the UVX continues to show profits.
Progress Report 39 Putting the last finishing touches to the momentum strategy part of my trading. I needed to have a screener for stocks with high momentum and high liquidity, and I am getting there. From then on, it will be testing, testing, testing. Having learnt from options these last weeks, I realize now that the vectors of income for options trading can be actually three: volatility, time decay and price movement of the underlying. Before I was just focusing on the latter, but there is probably much more to do. So many possibilities… But at least the finishing touches of the momentum strategy make sense, and now I can go loaded to the market and start tracking performance more seriously with some tests. Regarding my positions, the SHOP trade went up 5%, bringing the total of that position to +30%. There is a trailing stop at -8%. I closed UVXY for a $3.8 credit on ~$42 money at risk (9% upside). DOW ended out of the money 100% lost (position was small, though).
Progress Report 40 Bearish Wolf Short update today. I spent practicing mental mathematics, and then a big part of the day (5 hours) were spent talking with a friend about options and sharing my future strategies with him.
Progress Report 41 I have been thinking for quite some time now about what is the best step moving forwards to meet my goals in the fastest manner. The decision right now is concerns my time commitment to trading during my last year at university. Finishing my master by summer 2021 is one of my main priorities right now, but parallel to that I can still invest a lot of time in options trading. And for this I see two possible paths. The first one is continuing on the direction I am now and develop my own discretionary trading strategy that can surely build up my wealth. This would be mostly a one-man endeavor: me with my computer, doing research on what works, what does not work and test out different things. There are some friends that have showed some interest, but it does not seem like they have enough time or commitment for me to ask them to 100% embark on this journey. The second path is applying for a position at a proprietary trading firm as some sort of ‘part-time trading assistant’. Here, I would be assisting some professional and learning by exposure. I would not have the time to devote into developing my own trading strategy, but I would have the opportunity from learning from the best and at the same time being rewarded with a salaried position. Moreover, I would not have to go at it alone. So this is the situation I found myself in right now, the two choices from which I can decide. And if I gauge all advantages and disadvantages of each alternative fairly, what makes more sense is applying for a part-time position. This is the best next step for the continuation of my goal to become a professional options trader. I have been briefly looking up some firms in the Netherlands, and it seems like there are a couple of firms where this is a possibility. So this is my new commitment: finding such a position in a prop trading firm. In parallel to applying for these positions, I will continue building my trading strategy as I have been doing so far. I think it is very convenient that I have the summer coming up where I basically have to put zero attention to university, so that I can focus on options trading only. But the time commitment will now be divided in a career in options trading and building my trading strategy. I think both of them complement each other quite well. One thing to note is that competition for such a position is quite high. Performing well in tests, going through multiple interview rounds and showcasing your knowledge are all part of the necessary process to get in. This will take some time to prepare, for sure, but I believe I have enough going for me to be able to perform. Eventually I will get there, one way or another. It just takes time and hard work, I guess. Regarding this, what I would prefer is finding a position that I can start on September, so that it is something that begins alongside my studies, or maybe even earlier. But we will see what life throws at me. Some other things that I have been doing besides ‘thinking’ is modifying my blog for better readability and continuing learning mental mathematics strategies with which I am almost done—ETC: 25-June. The blog in particular took a long time investment today because I was figuring out how to publish with . I eventually cracked the code, but it did take a good couple of hours.
Progress Report 42 Bearish Wolf What has been keeping me busy today: University mostly. Preparing for an exam on Wednesday. Opening up new trades. How has my portfolio done today: Open (before today): SHOP Nov20’20 800 CALL (long). Daily P&L +7.76% Total P&L: +51.51% Opened today: UVXY Jun26’20 36 CALL (short) @ 2.53 No P&L info yet. UVXY Jun26’20 35 PUT (short) @ 2.59 No P&L info yet. Closed Today: None Observations Note the new layout of the progress reports. This is how it is staying. It needed to be systemized, and now it is. It is a lot shorter as well, so that less time is lost. Important observations will still be part of the reports, and will appear down here, but note that they will be less frequent.