March 2015 – Travels and Trades

Mar 30 – Trade Plan

Markets bounced more than most expected reaching around 208.5 today before settling around 207.93 at close and after hours. I rolled the debit spread up on the MIC a bit (selling the 1220 puts and buying the 1190s). We’ve had a bit of whipsaw happening lately and we’ve had to adjust. A bit annoying but we’re still probably going to end up around 4% with a most likely worst case of about 2.5-3%.

Our May MIC is doing fine, the volatility collapse helped a lot. I entered most of the trade on a big 2.5% down day. The calls are getting a bit pressured but we’ve got another 5-10 points before having to adjust.

The Alpha protector is doing great! Especially on up days like these.

Mar 27 -Trade Plan

Haven’t posted in a while. Been busy with the vacation.

This week was pretty interesting. The market fell quite a bit, just look at that daily candle. We’ve ended the week at the same level. Chart taken from Cobra.

The protector portfolio is up about 1.5-2% while the market is at 0%. This is because of the alpha picks used. It’s a long hedged portfolio so when the market falls, it falls at about half the rate when we’re so close to the long put with a delta of 50%. All in all, performing as expected if not better.

The Apr MIC is up about 3%, pretty good result considering it went down to 1207 back up to 1267 and then back down to 1225.

We used the big down day as an opportunity to enter the May MIC.

All in all, despite the market now being neutral for the year, we’re doing well.

Mar 20 – trade plan

I write this post from 38k feet above the earth in a plane enroute to cayman. First time I’ve had a flight with Internet access, it’s surprisingly quick.

The last few days have been quite good. The market rose a significant amount after dovish remarks by the fed. My portfolio is at all time highs for the year.

We had to adjust the mic a bit on the rise and its up around 2-3%. Was very diligent with adjustments and I am pleased about that.

Mar 17 – Trade Plan

Both the momentum and SPY/TLT trades are now closed for good. We’re left just with protector alpha and the modified iron condors.

I closed the SPY/TLT pair trade for -14.4% for February and +10% for March. Those aren’t terrible results for the amount of volatility present in TLT and SPY during those months. Not to mention that SPY/TLT both fell for a while there in late Feb/early March. As well, TLT was up 11% in January and fell the same in February, that’s a lot of volatility for treasuries. It’ll be the last official pair trade for a while.

The momentum portion is also now closed at 0.25% profit. I don’t leverage this and its not attractive for me at this time. I like to use leverage with low-volatility strategies that have low max draw downs. Owning any equity unprotected is just too much risk for me 🙂

This months MIC is up 2.4% so far and I typically leverage it about 3x. The previous month I did 5.7%. I took off 14 1180/1200 debit spreads yesterday.

The protector Alpha is up about 1.4% for the year including the hedge. Spy is up about 1%. We’re outperforming the broad market AND we’re 100% hedged. Good result indeed. My expectation is that this will chug along and end up 10-15% for 2015. I leverage this at 7x usually so it’s up about 10% for me on the year.

On that note, what do I expect going forward?

I expect to do about 3.3% a month on the MIC and an average of about 10-15% a year on the Alpha protector. I leverage the MIC about 3x and I leverage the protector about 7x. So with leverage I expect about 10% a month on the MIC and about 7.5% a month on the protector. This is the return on the actual equity I have invested. My position and take on leverage is this: If I’d normally invest 250k in some strategy but I can do it with leverage and have only 50k tied up, then why would I tie up 250k? First, I determine my max draw down that I’d be comfortable with and then I put the least amount of money I need to work to achieve this level of risk/volatility.

As an example:

Let’s consider the protector. Let’s say I am comfortable with a 100k draw down and I figure that this is the MDD on 1MM of hedged equity. I first must accept that I will likely have a 100K draw down at some point in time and be comfortable with that. Next, because I have portfolio margin, I figure out how much cash I need to put up to achieve that goal and I put the least amount down as possible which, for this example, is roughly 150k at 7x leverage. Now I have 1MM worth of exposure at 150k and I am comfortable with the likelihood of a 100k draw down. It’s a concept that Scot bilington built into his optimum fund at Covenant capital. That’s a 66% draw down on original equity! That sounds crazy but it isn’t IF you’ve put down 7x less than you normally would have.

With the protector, I am comfortable with a max draw down and while I don’t suggest other people use this amount of leverage, it can be quite useful when handled with absolute care. I do it because I understand the draw downs and the risk and I can afford and stomach the swings. When you leverage the protector at 7x, you can expect 25%+ draw downs mark-to-market. With the MIC, if you set a 7% max loss, you’d have a 21% draw down.

As for the travels:

Tomorrow we hit London for a night, followed by Toronto for a night, then the final destination – Grand Cayman!

Mar 16 – Trade Plan

Futures are up a boat load. We’ll likely have to adjust the MIC a bit today. This week is a big week with the FOMC meeting on Wednesday and it being triple witching for option expiry (quarterly expiry). PastStat posted that weeks like this are up 22 out of 26 timers. So I guess bias is on the upside this week.

We’ll likely remove 18 debit spreads (1180/1200) and might move up the 1190 to 1200. We’ll see how today goes. The trade should be up around 2% today.

We have lots of rebalancing to do today for the Alpha. Alpha should be up nicely as well today.

Weekend Post

Good weekend reading:

http://fat-pitch.blogspot.com/2015/03/weekly-market-summary_14.html

Upcoming travel:

Last year we moved to Malta from Grand Cayman thinking the Med life may be more enriching for our young family but meh, Cayman crushes, it’s just such an easy relaxed life. So we’ve decided to move back. So we’ll travel in the summers and live in Cayman the rest of the time. I miss waking up, putting on my flip-flops, grabbing an ice-coffee and starting the day at Del Sol. I literally never wear pants in Cayman, just shorts. It’s the life. Pants are for chumps. Way to restrictive 🙂

We’re building a house there which I am excited about. Can’t wait for it to be finished.

To prepare for the move and to get things moving on the building front, we’re taking a vacation to Cayman next week for 11 days then Toronto for about 3 days. We are so looking forward to that. It’s home.

Mar 13 – Trade Plan

Every day is interesting, isn’t it?

Markets have had a huge bounce which is obviously good for the majority of our trades. The protector is up and we’re mediating our SPY/TLT losses a bit (at 15% now).

The protector is up as it should be.

The MIC trade is approaching an adjustment zone. Not ideal as we adjusted on the way down just a few days back by adding 18 1200/1180 debit spreads and it appears we might have to take those off if we hit 1243-1245 on RUT. It hit 1206 (we adjusted at 1208) and it bounced to 1237 yesterday. Part of the game. The trade is up 1.33% to date with theta at about 1700 a day.

Mar 12 – Trade Plan

The SPY both opened and closed below its daily Bollinger band. This suggests more downside ahead as the momentum is strong. The bullish percentages are also quite negative.

http://stockcharts.com/freecharts/candleglance.html?$BPNYA,$BPCOMPQ,$BPOEX,$BPNDX,$BPSPX,$BPINDU,$BPFINA|B|0

An explanation from a respected technician @ the cobra forum (uempel)

Bullish Percentages – for those who might not know: BPs show the percentage of components of some index (e.g. SPX has 500 components) which are on a P&F buy signal. The percentage change of a BP indicates the general direction of that specific index: if more and more components are on a P&F “buy” the index should move up. And vice versa: if the BP goes down most likely the index will tank too.

Only problem is that BPs are not capital weighted. Whereas most indices are – the exception being the DJI. This means that even though BPSPX is down 1% the SPX index might be up – this could happen when heavily weighted stocks such as appl or xom are sharply up a few percentage points.

Today’s market at the close:

BPCOMPQ -0.87%, BPNYA -1.64%, BPSPX -2.18%, BPOEX -12.86%, BPNDX -1.37%, BPENER -13.64%, BPINDU -4.35 – only BPFINA is flat.

Though we’re getting oversold, it all suggests we got some more downside to go, or at the very least, we haven’t seen the bottom yet, but its probably close. The target could be the 150 DMA at 201. That’s where the last downside move finished. Does this change anything for me or my trading plan? Not really. I may do slight adjustments on a bounce today as I did Monday and there is no reason to touch either the MIC or the Protector so what am I left with? Just the few straggles of other trades I have going on (SPY/TLT) etc

The alpha protector did pretty good today, it was positive the entire time even while spy was declining at the end of the day. The individual issues in the alpha section were out-performing the broad market. It put the entire trade positive for the year. I am obviously very happy with the protector results thus far. It’s not really a trade as it is a nicely hedged long portfolio that is measured on years. It’ll perform in all market types. I expect the alpha protector to do 6-10% in bearish years, 7-11% in neutral and just under perform SPY in big bull markets like 2013.

The protector draw downs are an interesting subject. If you start the strategy and the market moves up, the delta on your long put starts going below 50 pretty quickly. In this case we bought at 205 and we reached 212. Unless we rolled the long put 205 to 212 the gains are more or less not protected, we’re under insured on the gains we’ve had to date. So as the market falls back, we’ll see larger drawdowns from peak until we reach about 205 when the delta is back to 50%. As it goes further and further below the long put strike, the more and more the delta will increase and our portfolio losses will be matched by gains in the long put. We typically roll the longs at about 6-7% in gains so we were due to roll at about 217-218.

Mar 11 – Trade Report

So yesterday was an interesting day.

SPY is both negative on the year AND it was a big 1.65% down day. During these types of days I like to analyze the resilience of our trading strategies, especially, the a protector portfolios.

So let’s recap: SPY opened the year at 206.38 and it closed the day yesterday at 204.98. It’s down 0.68% for the year.

The equities (alpha portion) is actually up about 0.4% on the year and the hedge is down about the same. We’re essentially break even on the Alpha protector portfolio and the market is down nearly a percent. Better than expected. Had we used straight RSP we’d be down about 1% (0.68% + 0.4%). Note that over the course of the year, the hedge would pay for itself and we’d consider ourselves up 0.4% on the year. Factor in dividends etc and it’s even more. We can expect the trade to do well in bear and neutral markets . Having only been in the trade for a little over 2 months and being break even while the market is down is fantastic. The trade under-performs for its first few months typically as the hedge is far from paid for.

The momentum portion which we had running for a bit ended break-even.

The SPY/TLT pair trade for March is currently down 17% vs SOs 41%. We’ve got about 7% of the position left (201/196 and literally a few 205/200s and 206/201s) with a few TLTs. Maybe we can get it down to about 15% loss. Monitoring. The Feb trade was up 10%. So we’re down overall on the SPY/TLT trade.

The MICs have all done v. well. Glad to have refreshed and realigned my outlook on the MIC. Looking forward to managing this and the protector as my main strategies going forward.

So in conclusion for this very volatile year the results after a huge down day that took the markets negative for the year:

Protector: 0%

SPY/TLT: -7%

Momentum: 0%

MIC: TBA

Mar 10 – Feeling OK

Looks like a bad day a’ brewing for the markets.

I spent the last few days sick in bed really contemplating my plan going into this week. Having read a lot of really good analysis (like the one I posted earlier), I planned on adjusting quite a bit on any bounce move with the presumption of another leg down. I did just that, not in such a way where I was trading discretionary but in a way to start moving towards getting out of several trade types I no longer want to to do and to position my overall portfolio in an appropriate way (overall deltas etc). I am feeling pretty good on this huge gap down today. I had entered a small amount of April TLT/SPY about 2 weeks ago, I closed out the majority of that yesterday having become sick of the trade and having taken advantage of the bounce in SPY and I also closed off all but maybe 3-5% of the March SPY portion (a small handful). I also adjusted and rolled my protector/anchor spy appropriately. All in all, feel like I used all information to weather this small correction. We probably got the TLT/SPY March trade down to a manageable 15% loss as compared to SOs 41% loss!

The April MIC is obviously affected by volatility right now but we’re managing the trade like a boss. I had entered 15 debit spreads yesterday on the bounce to get the delta closer to about +10. Today I entered another 15 on the fall (I definitely over paid a bit this AM but it was falling fast). I paid 7.00 for 1200/1180s with RUT@1208.5 It’s now 1209.23 and the MID is 6.80.

Current Greeks

Delta: 23

Theta: 83

Vega: 370

The trade is currently positive by about 1%.

Soon come, I’ll probably just be managing protector and MIC trades with the occasional earnings trade. Keeping it simple. Keeping it rule based. The SPY/TLT trade is out for me as is momentum. Don’t get me wrong though, momentum based strategies (or trend following) is a very very good strategy, a place where 99% of the population should put their energies. I put a shit ton of time into learning about it, read about 5-6 great books, been following and listening to a lot of great podcasts etc. It’s got its place but I am a leverage guy, I like to leverage and I can’t sustain even minimal draw downs. So it’s just not for me. I’d highly recommend it to just about anyone that, well simply put, is not me. I leverage, I manage and I understand risks. It’s got buy and hold crushed. You’re getting 14-16% returns and you’re getting max drawdowns in the 12% range. Rotational momentum strategies is the place to be if you’re a regular investor/trader who wants to do minimal trading (once a month. The momentum strategy I followed would rotate between the top 3 of the following ETFs

TLT, VNQ, LQD, GLD, VEU, VWO, IVV, VB, IEF, DBC, BWX, JNK, IJS, IVE, EFV

I stole this from Steady Options. That’s the idea of the returns of the above trend following. 14.55% avg CAGR with a 9.47% Max draw down over the period. It’s solid.