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.