Discussion in 'Journals' started by beerntrading, Jul 28, 2017.
Short Friday's $31 MU calls for .34.
Walked this strike up, it's a straight calendar now.
Great thread. Brand new (day 1 on ET) fellow CO guy here from south Denver metro. You helped me see how much I have to learn and what diversity in strategies are out there. Keep up the great posts!
Welcome to the thread! Feel free to ask or comment on anything.
And sorry folks, had to take a week to step back from the market. I only let the MU calendar spread run last week, which obviously was not a great position, but I closed the whole thing with both sides ITM after it moved a lot against me. I'll be slow to get back into this.
As far as the diagonal strategy as a whole, it's sitting about even right now between realized and unrealized gains. The market generally did not materialize with the direction I was thinking, and the spreads are now too wide to play the strategy effectively. I'll be closing out what's left open over the next few days / weeks.
And I'll be back to a credit spread strategy until I see another good diagonal entry point (realistically, this strategy only works well enough between earnings releases).
So, closed out the long side of DAL (.53), MSFT (1.36), and CSCO (.57) today. As called on here, the profits were as follows (total gains across all positions as a percentage of the opening long position):
CSCO - 19% gain
DAL - 7% gain
MSFT - Flat
MU - 36% gain
And the JPM long is still open at 55% realized gain and 82% unrealized loss.
Using JPM's current value, the strategy is sitting at 7% gain across all 5 positions. If I closed the JPM at a total loss I'd be at about 3.5% gain. Those figures also take into consideration the VIX hedges.
A little bit of perspective here. I fucked up royally with the VIX on two separate occasions. The first was explained on here, and the last week I took the week off, and so when another VIX ratio spread expired, I was bare again for yesterday...FML Had I handled those positions correctly with standing orders to sell to recover previously determined percentages of the strategy's total at risk, I would have had around 142% recovery from those two positions (we'll call it NK1, and NK2/Harvey)...which would have put the positions on course for 150%--which is about what I would have expected had the nuclear thread and hurricaine not intervened in the market. Even with screwing up royally and having an awful two weeks (to the point I'm actually surprised this was profitable overall), this was still actually profitable. Having been well stress tested during the last month, I'm confident to put this strategy live the next time I have an opportune entry--which I don't foresee until at least the January earnings season is over.
So, I'll call this one a win. Even grossly mismanaged hedges, and in pretty bad circumstances in the market for these positions, the thing was still profitable. And I'm feeling a lot better about the awful last two weeks.
Closed out the JPM $95 Oct calls today for 1.20. Recovered quite a bit in the last 12 days. This brought the JPM to flat, at the whole strategy to a close with a 14% gain.
And I'm back to life after weathering my annual cash crunch. Going live as of today with my credit spread strategy. One risk I've found with this strategy is if it's compounded fully, the draw downs will eventually catch up to you and wipe out the account. The answer to this is to step up the amount exposed each week by about 4%. However, on weeks with a loss, the 4% will go towards offsetting that loss. Any loss greater than 4% will be filled in with the non-exposed account cash. That amount in excess of 4% will be held in my account reserve balance until it hits 80% of the exposed capital (a moving target), to then be distributed to my investing account (40% of gains), a tax liability account (40%), and put back into this account to compound as above (20%). Based on my experience with this strategy, I anticipate we'll
These are straight bullish put spreads with a 10/6 expiry. The exception here is the SPX hedge that is a (bearish) put debit spread (normalized for a $10k account w/ commissions and rounded to even dollar so you can see how these work together):
8x SPX 2500-2510 for 1.10 debit. -$893
12x AAPL 150-152.50 for .63 credit. $739
12x GS 235-237.50 for .59 credit. $727
24x PM 110-111 for .29 credit. $667
28x JNJ 130-131 for .30 credit. $806
Total credits: $2,046
Maximum potential loss: $9,154
Maximum expected loss: $2,746*
Target gain: $1,200
*Maximum expected loss presumes high correlation on a systemic downward move where the SPX hedge goes up in value while all others go down. Maximum potential loss is an event that would occur approximately 1.15% of the time if prices were random; but due to high correlation with S&P the actual likelihood of this situation is substantially less. Target gain is the the 50/50 chance if random; in practice, this is nearer the 56 percentile event.
@beerntrading I am a little rusty on my premium selling (mostly buying prem in this low vol environ) but on a CS if you have a SL if your short strike is violated and stick with proper trade management where is the "wipe out account" fear coming from. Note..when I do trade CS it is OTM 20 delta stuff.
Years of working insurance. I say that both a little tongue-in-cheek, and very seriously. I know from experience being on the hook for the rare event is more a function of the number of times you test fate than the likelihood of it's occurrence in any one round of trading.
Working so close to price action, I routinely blow through my soft and hard stops on a gap down day. Certain events (North Korea, health care bill collapse...for example) can cause everything to gap past it. That's where the SPX and VIX hedges come from--the VIX is a new addition because it provides very inexpensive relief when it kicks in.
But it's possible for the SPX to go up or stay flat while AAPL, JNJ, GS, and PM go down 1-2%. Not likely obviously due to correlation among those. That's somewhere less than a 1 in 500 event. It's basically the 'news risk' of an individual stock hitting on each of my positions while not effecting a larger market-wide reaction.
It's not that I'm worried about that specifically, but it factors in as a consideration to how much I can compound the account for when that once in 10 years (or less frequent) event does in fact come along.
Ok, I see how being closer to ATM the risk profile is different. (I had edited my original to mention my usual 20 delta range.)
I didn't see the update...but yeah, I'm a little bit closer.
But, I don't see the logic being any different. Even if I did the same strategy further OTM the same logic applies (that eventually an uncorrelated move will hit you adversely to an intolerable degree if you fully compound).
Also, if I get one more strike OTM; between BxA spreads, liquidity, and commissions, I'm looking at exposure of around 93-94%-ish of the total spread (vs. around 80-84% that I aim for now).
That really gets at the crux of my strategy--I'm looking at probable maximum losses vs. possible maximum. I calculate my expectations based on probable losses, but I always keep possible losses in mind. Which circles us back around to your question and why I think my logic still applies even if you're further out on the strike.
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