This is a place for me to post live trade calls, musings, opinions, and the lessons I learn in real time. I've branched out a little bit from my go-to instrument (options), so it seemed like a good time to start a new one. I want this journal to be more approachable; and inclusive place where all are welcome. You'll notice my trading is more about risk management than anything else, and I'll try to highlight some of the specific risk concerns I have and how to hedge against them. I'll also do my best to give the rationale behind a given trade or sentiment. Currently, I have a small account to perform live testing of strategies. My former journal (Beer & Options) is me working out the kinks in one strategy (credit spreads)--and that one is ready to go live when market conditions favor it. Three consecutive weeks of short weeks for me (because of a vacation and the 4th) provided a break in my trading activity with that strategy. That strategy was also based on an unclear market outlook. Having a clearer view of where we're headed, I'll be moving to more profitable diagonals--I'll try to give a solid run down of that strategy in the coming days. Today's positions, Diagonal (all previously opened): JPM - Long $95 Oct Call, Short 8/4 $92.50 call. I paid 0.98 debit MSFT - Long $75 Oct Call, Short 8/4 $74 call. Paid 1.23--more than I should have, trying to leg-in. PM - Long $120 Sept Calls, Short 8/4 $118 calls for .60 VIX - Ratio spread. Short 1x 9 call, long 2x 10 call as a hedge positions for .45 debit I also have a debit spread open on AAPL on 145-150 for the 8/18 calls. I may or may not run this one through their earnings. I got a good early read on PM today, and bought $115 8/4 calls for $1.10, then dumped the short side of my diagonal spread, then sold the $115s for 1.80, and then dumped the long call on the high volatility for an awesome day there (real time calls on this one preserved in @Max E.'s STHH). For some fun, look at the self doubt on full display as I went from thinking I'd blown my whole trading account to having a amazing day in the span of just 23 mins. At the moment, both JPM and MSFT are pretty close to even, so I won't hesitate on Monday to close them out for a small loss if we see a big jump on the VIX. Oddly, in spite of being bullish (which I almost always am), a jump in volatility will serve me better than a good day of earnings. I'll lay out the diagonal strategy soon when I have more time to devote to it--I'll also make a post fairly shortly about how I do position sizing and certain risk management techniques that aren't specific to one strategy. I hope others can learn here from my mistakes. But it's always been my style to learn the hard way. ====================================================== My background (This isn't that relevant to trading, so feel free to stop reading here): I definitely take an investor's view of the market. But I work in insurance, and because of the specific type of insurance I write, the knowledge translates very naturally to options. My dad pushed me into investing when I was young and I bought a mutual fund in 1999, and then opened my retirement account in 2006 while I was working and going to school. Needless to say, I don't care for mutual funds or ETFs. I started managing my own portfolio in 2008, and trading in options in 2010 (and I have my retirement account still). My degree is International Relations. I intended to go further into grad school or law school with it, but I graduated in 2008, and I was pretty good at my job in insurance, so they offered me a job. By the time I could give consideration to taking my education further, I was making too much in insurance to give it up. That's how insurance murders your dreams. Now my goal is to get to the point where I can retire from insurance, and trade and invest for income while I do stuff I enjoy, like travel and learning. I've always been really good in math (as in, finished calc 3 as a junior in high school). I'm conceptually proficient with just about anything I've come across. I'll never forget the day I was sitting in calc 3 and realized if I ever needed to use this stuff, I'd have to learn it again anyway and just gave up on trying--but followed along conceptually (and proceeded to get my first and only D in high school). That was the moment I moved from pursuing an engineering degree to something I enjoyed more. I have a tough time explaining the way I look at numbers, but it's less rigid than most traders. Working insurance has kept the basic arrhythmic sharp; but I visualize number more than handle them 'digitally'. I'm not sure how else to say that. It manifests itself in a number of ways. For example, I don't use the greeks because I can see these with the raw prices (this is the part that I brought over from insurance). I don't really try to quantify my strategy in rigid terms either--I firmly believe that increasing a model's precision can decrease it's accuracy. No prizes for figuring out I like beer. Mostly IPAs and Pale Ales are my go to. I also enjoy wine (bold reds and pinot noirs) and cocktails (not sweet). I usually don't drink while trading (as my name might suggest), but that has more to do with trading overlapping with my day job. I'll leave there for now--and bring other stuff up as it becomes relevant.
LEAPs and Taxes I was discussing this tangentially in a PM with someone, and thought I'd post it here. This is more an investment strategy than trading, but it's very powerful, and traders might like it too. The idea is to utilize US income tax policy (specifically marginal rates for LT vs ST gains). It's the only strategy I know of where you can tip the scale definitively in your favor with a random sampling of options. It's painfully simple. In early January, you buy options that expire the following January, file them away and forget about them until Christmas. The close strategically at the end of the year or beginning of the next. By the end of the year, you're sitting on a number of winners and losers. If your trading year was good, you close the losers before Dec. 31 to take the losses to offset your ST taxable gains. You then hold the winners until you've had them at least a year and a day and take them as long term gains. Depending on your state and tax bracket, this means uncle Sam is paying nearly 30% of your losses (net, vs. capital gains). How you select these isn't terribly important. I'm inclined to believe strangles corresponding to your investment portfolio provide the most value. You want more calls than puts (I think 60-40 is the mark here...but I can say definitively it's between 55-45 and 68-32). The worst down years have been worse than the best up years, but more years have been up. Here's where this is broken down: http://basehitinvesting.com/the-stock-market-a-look-at-the-last-200-years/ Statistically speaking, a long option should be a winner on the bid, and a loser on the ask. So, we would expect the strategy to have a net $0 return over many years (less commissions), and it makes money purely based on how it's taxed. The key to this strategy is properly sizing positions, diversifying, and keeping the account the right size relative to the accounts it works with. You're also under no obligation to sell, you could exercise as well (and likely early if it made sense). There's some draw backs here, mostly that you have to project your position size based on your expected account value at expiration. It also ties up capital you could otherwise trade with. But there's no set way to do this one--just an interesting thought to seed in your mind. I'll get into more detail on this one come January (or even in December) when I start in on it myself.
It may work for the first year, but it won't work for the following, and they will be on you like white-on-rice. Seriously, do you really think you have found something that nobody else has ever thought of, to try to cheat the IRS? It ain't happening. Welcome to USA Taxation.
Can you tell me why? I've had doubts on this one too for exactly that reason, but everything I've read doesn't suggest this is disallowed. There's pitfalls of wash sales, and the risks of holding the winners longer than the losers, but there's nothing wrong with tax advantage trading...if there were, LIFO and FIFO wouldn't exist, not world tax efficient mutual funds. Also, one of the key tests for disallowed positions is if there's risk or not, zero risk positions are not legal tax devices (I.e. Going long a stock in one account and short in another to lock profits) And thanks for the input, that exactly why I post publicly...suss out what I overlook in a strategy.
I closed out the short side of that spread today for .37 debit. So I effectively hold just the long side of that for a 1.35 debit. This was based on the short term bullishness showing in JPM--I'll open another short as it makes sense to do so.
I dumped the short side of MSFT today for a .07 debit. Just long the $75 October calls now with an effective entry of 1.30. Hoping for one hell of a bull tomorrow. (Also dumping the short side of a debit spread on AAPL calls I've been holding). And I also made a live call on DAL in another thread here. Long the 8/4 $50 call, and debit spread for 8/18 on 50-52. Entries were .23 and .45 respectively. This was a musing I posted in a PM--thought it might be an interesting read for some. Regarding how robust the bull market is: I don't think this is historically high valuations. On an exponential chart, we're right on target for the long term trend, while clear bubbles can be seen preceding each prior crash. The historic P/E ratio of the S&P might look high at the moment, but not in consideration of forward P/E. As long as the earnings party continues, the valuations will continue upwards. I don't think F and GM carry the weight they once did on the market. They're getting hit from all sides (disruptive competition, ride share, fewer shopping trips to be made, demographics, longer lasting cars, lessening air fares...). On the other side, it's disruptive companies that are propping up the high P/E ratios--think that AMZN alone makes up 2.5% of the S&P and contributes no earnings. The last time humans saw this kind of change of habit over a single generation was after the civil war through 1929 (when railroads, automobiles, radios, refrigeration / A/C, telegraph, electric lights...). The run that ended that was a 16-year bull market, with two 12-year bulls immediately preceding it. Today's AMZN and NFLX naysayers sound quite similar to the railroad naysayers of the 19th century. And they were right in the early days when everyone with a hat to hold out to beg could find financing for a railroad (or a tech start-up). It wasn't until they consolidated that they really took off and ran. You notice how people complain about the decreasing number of IPOs today? To my mind, we're in a mature bull market, and this is just the beginning. When the bubble forms on this one, it's going to look even less sane, and even more frantic. It's going to burst in spectacular fashion, but anything left on the table until then is just that much less cushion for the fall.
Got the short in. I missed the peak at 157.97--looks like 159.20 is the real one. Locked in $13 on each of my $145 calls though. Up 280% on that position.
Back short on the MSFT position with the 71 call for 1.13 credit. Needless to say, my account balance looks pretty today. And opened up a DAL Dec $55 call for 1.18. This is the top side of a diagonal play. I'll open the shorts against this when it looks more bearish.
Great Days Lower My Trading IQ This is a pattern of mine I've known about for some time, and I've noticed it holds true. Whenever I have a really good day/week trading, the following day/week is a bomb. I suspect this is me moving from risk-centric trading to reward-centric. I even know about this pattern, and I still fall into the trap every time. I'm trying to figure this one out so I can just stop the bleeding. My trading style is typically to limit my risk and expose myself to market gains. This means I tend to grind along with small winners and small loser until the big one hits and I cash in on that. This week was AAPL's earnings release. Without fail, the day after a play like that, I screw it up and have a big losing day. One thing is, I have a tendency to roll a percentage of my big winners into highly speculative plays--and this is foolish. I think that is the easiest problem to address and I need to work on that. The other thing I suspect is the problem is trying to look for other big winners when I'm riding high after the last. It starts out innocent enough, I'm looking to expose capital to the market on strategies I know well and know work. But, as I'm looking, I see other opportunities for big wins, but also big risk. And, even knowing better, I get into the mindset of "at least I won't be worse off than yesterday, so what the hell..." That's the killer right there. I did have an amazing run while I was on vacation with a CMG short position while I was on the beach. And kept most of the gains and didn't do anything dumb like try to let it ride. It was disciplined entries and exits. I think that since I was on a phone and couldn't see the broader market, I didn't have a clear picture of what was good opportunity and what wasn't. And the travel provided enough discontinuity that when I returned I accepted my new account balance as the baseline, vs. looking back before the run. That gives me a pretty clear path forward with some new rules for big winners: 1. Move the cash out of my trading account immediately. This can be introduced back in, but taking it out hopefully makes me think of it as cash going in, rather than winnings. 2. Rigidly adhere to my known profitable strategies the day after. Symbols I know and like, strategies that are very risk-limited, high percentage / low return... 3. Flatten out anything that needs attention to limit risk and just take the day off, not even looking at the market. No. 3 is very difficult for me because I compulsively look at charts whenever I get bored at work. If I traded full time, I'd be up in the mountains hiking on some of the many trails I know I don't get phone service. I'd come back clear headed and without the baggage of having just won the big one. ====================================== Here's one symptom of that mindset: There's the entry on the arrow, and the stop on the horizontal. The trade was pretty straight forward, the chart is yesterday for SQ. Bullish on SQ, clear stop at 25.75 (based on the 3-day). The trade was clear. Entry at 25.84 on a market order. Immediately placed a contingent order to place a market order if the ask got below 25.73 (on the risk that price action bounced around the support level). Good trade, stopped out. This is a perfect example of how a good read on the market doesn't necessarily translate to a good trade. The stop was also a clear entry signal that I should have jumped right back on--I didn't, thinking I'd already lost enough. Usually I forget about trades I passed up and move on--cash in my pocket is still cash--but on the stupid days like yesterday, these start to eat at me and that evil "what if?" creeps into my mind. =========================================== Ultimately, in the last month alone, I've left more than 80% of my account's starting value on the table pissing away good winners after a good day (pretty close to flat, since that was just losing the big winner's gains). Cutting this one source of stupidity out of my trading would do wonders for my account balance. The problem is, I know the problem but I still fall right back into that same trap of stupidity. I call these my Blair Witch days, because I just circle right back around to where I started in spite of recognizing all the landmarks along the way. Also, those days are about as satisfying as that movie was.
The absolute hardest part of trading, at least for me is managing those losing days and actually stepping away and doing something else instead of subjecting your account to additional risk on a day when you're not "on" anyway. I've found that when the losses start mounting, the day usually gets worse not better. Every once in awhile I can salvage a losing day but most of the time when I try, I end up just pissing more money down the drain. This is my biggest downfall and always has been. To be a successful trader you have to know when to call it and move along for the day in my opinion. I just looked at my numbers for the past month. 6 losing days and 13 winning days but I'm net down on my account, % wise fairly sizable. 4 of those losing days were minor, 1 more than I'd like and 1 extreme. I need to get this part of my game in check and it sounds like you do as well, best of luck, following your journal.