April 2015 – Travels and Trades

Apr 30 -Trade Plan

The weeks been volatile. Luckily, the way I trade now, I barely have to be present and I barely have any stress. I have alerts setup and I take care of them. However, that said, when I enter the trades for the following month, I tend to have to be more present with monitoring the markets especially during big down days as I use that as an opportunity to get paid more on the insurance I sell. It’s funny, I now love big down days, because I salivate at the increases in credit for the MIC legs I sell. I rub my hands together, get excited, and start putting in orders.

I’ve got about 30 units in for the June trade via both RUT and SPX. I got some good entry points. Once I close off the rest of May, I’ll probably add another 10 units max. Now, the easy part, set alerts, wait for ’em and adjust. Every morning I do review all the updated greeks on each trade and make sure the alert points are set.

Note: The SPX options are now open a few hours earlier which is kinda neat. I forgot about this and was pleasantly surprised to see some GTC orders close pre-market. Gives some flexibility in the trade during big pre-market moves. I like it.

I haven’t been too close to adjustment on any side (both for the May and June trades) yet so things are fine. I have “here and there” sold some call and put spreads on extremes but nothing really relevant. I’ve been peeling off portions of the May trade via GTC orders. The trade should do 6% (maybe 7%) overall depending on how the markets are until Monday.

I’ve reduced my protector portfolio by about 20% when it hit the highs around SPY@212. I feel more comfortable with the MIC trades in these types of market conditions. I feel and understand MIC trading dynamics so well now.

We’ve solidified plans for our move back to Cayman, the kids got into a school sorta by a favor (unexpectedly) and we’re going to be back by at least September. We have no idea if we’ll go back earlier or later. We might drive the Tesla down to UK to try and sell it (which equals extended road trip). Maybe extended 3 month road trip? I don’t know 100% yet. Someone is interested in it here, called excitedly as he was boarding a plane and is comign back on the 8th so it might sell then. We’ll see. Can’t plan anything because of the unknown variables of the everything

Apr 23 – Trade Plan

The May MIC is now up 5.6% and we’re going to start looking at peeling some off. We’ll likely get it up to 7% by next Friday. We’ve got a ton of room on each side, so we’re sitting pretty. It’s been a solid month. Happy with the results. Had some adjustments throughout but still managed to eek out the higher end in terms of return.

I entered 3 units of June yesterday with some of the up and downs

1140/1120 put spreads

1330/1350 call spreads

Not much else to report.

Apr 20 -Trade review

Today we had a nice little bounce in the markets, I used the opportunity to rebalance the alpha portion and size down about 7 percent overall. I didn’t like the size of the alpha protector as compared to the MIC in terms of margin.

The MICs are doing great. I’ll check tomorrow but it appears we are up at least 5-6% with a possibility of getting 7-9% when we close. They are all well balanced and only a very large move will unhinge them. We will close by next Friday or the following Monday at the very latest. I will also enter June MICs slowly during the next 9 days and will try to enter them on a big down day to take advantage of the higher volatility.

Looking at Protector Alpha

Today I spent sometime looking into the composition of the equities in my protector alpha portfolio.

I’ve got about 5-6 different lists of equities based on mechanical/quantitative investing. I am going to trim this down to the highest performers to simplify and strengthen the portfolio in general. Some of the 5-6 are definitely under performers both in back-testing and in live trading and we’ll be doing a trim of these.

The top two performing with the strongest backtest is the Best 8 of the Minimum-Volatility sectors of the S&P and the Best 12 of the USMV (MCSI USA minimum volatility ETF). Both of these strategies originated from George Vrba at ImarketSignals.

The Best 8 universe is generally Health Care, Consumer Staples and utilities and represents anywhere from 111 to 119 stocks. Weekly, we take the top 8 of these based on certain indicators.

The backtests:

Since 2000: 10,760% vs 87.55% SPY

Last 5 Years: 369% vs 92.9 SPY

Last 2 Years: 99% vs 34.44 SPY

Last 1 year: 40.4% vs 13.91% SPY

Last 6 months: 22.5% vs 12% SPY

Last 1 month: 2.86% vs 0.14% SPY

The USMV Best 12 universe is 155 stocks and represents the lower volatility sectors of US equities. We take the top 12 of these based on certain indicators.

The results since inception (real money)

26.4% vs SPY 8.35%

The backtest for the S&P Min Volatility Best 8 is more extensive than the USMV but the results should be similar as they’re based on the same concepts and that is to benefit off of the reduced volatility of the selections and seek to benefit from low-volatility anomaly (that portfolios of low-volatility stocks have produced higher risk-adjusted returns than portfolios with high-volatility stocks). Further to this, taking the best 10-15% of that list takes that concept even further. When we’re completely hedged with SPY as a baseline, our results on the protector vs just holding SPY should be quite pronounced.

Currently, we use about 6 of these types of mechanical picks for our equities but the majority are not quite as attractive. We had some cloning, some small cap picks and other but we may just move to using a combination of ALFA ticker, Best 8 and Best 12.

Apr 15 – Trade Plan

I was analyzing and calculating results this morning and chatted with a few people about the journey and the results to date and really just about trading and emotion. I found that through my introduction to option trading till where I was now, the biggest battle I had was with myself. I bet people here that a lot in this world but to it’s important to really break down what that means.

Caveat: The below is more in the context of managing a month long trade and not anything to do with technical trading or the like. It’s about deviating from a plan and using discretion and “outside the plan” decision making.

Trading does really attract some smart people. Smart people like to gather and collate as much information as possible in the activity they’re engaged in. Trading and investing is quite unique in that obtaining as much data or more than the next guy won’t necessarily generate a winning trade. It may give you slightly better odds, but the market moves in such a way as to not be highly predictable. Of course, you might have slightly higher odds but we all tend to over estimate the value of our information sources and end up surprised when things turn against us. In almost anything else you put your mind to, having as much information and being able to process and collate it will usually result in getting better and better at the activity. Usually more information significantly increases your success rate, but in trading it really doesn’t (in this context). There is so much information sources/types out there that people will usually have a tendency to over-educate themselves and to gather and review a lot of complicated information be it macro economical or technical or what have you and they try to collate the data into some useable decision. A lot of times, these decisions end up being wrong and there-in comes emotion. Nobody wants to make a discretionary decision outside of their system and have it be wrong. The normal tendency is to try and win it back or to make it right or it might just generate a lot of stress and burn-out. I can say that I’ve never tried to make it right or win it back but I have generated a shit-ton of stress. Stress that wouldn’t exist if I followed a pre-determined plan. You end up looking and “hoping” that the market moves in the way of your discretionary decision. MOST importantly, people will look for information solely to justify the behaviour or action. Let me tell you, in trading, you’ll easily find suitable information to justify ANY action you want to take. That is a dangerous thing.

Discretionary adjustments bring about stress and emotion and those two things can lead to significant mistakes and over emphasis and over valuing information to justify further mistakes. That’s what it boils down to.

You avoid this by creating a plan, following it religiously and by having proper alerts setup to avoid looking at the market on a continuous basis.

My results for the MIC since May are:

May: 5.69%

Jun: -2.65%

Jul: 1.01%

Aug: 7.24%

Sep: 4.8%

Oct: 0.78%

Nov: -9.7%

Dec: 2.01%

Mar: 3.96%

Apr (still in): 4%

Average without Nov: 2.99%

In the November trade I had made some discretionary but probably significantly POSEV adjustments that cost me a large month and several lost nights of sleep and un-needed stress. Had I managed the trade according to plan, I’d actually have gotten out with a profit. Why was I trying to beat the trade? Well, I thought I had collated enough information to justify deviating from the plan. I mean, seriously, I still believe it was hugely POSEV but, hey, both times I thought that and went against proper risk management, I’ve gotten burned bad! It doesn’t matter if it was POSEV it was just too large a risk to take! What did I do? Well, instead of removing call spreads as my delta increased, I rolled them forward and increased the units. Why? Well, I had calculated the odds of the market going from 1820 to 2080 (as actually happened!) as quite negligible, especially in the small time frame of the trade usually after a fast down like that there is another down leg (opposite of a bounce). Every indicator was flashing insane over-bought. The position I took gave me a huge up range (apparently not enough). I found probably 30 sources of information that would have attested to 2080 being <1% chance. It was unheard of, I think the market moved like 200 points in a matter of 7-9 trading days. Suffice to say, the market kept going and went hard up. I had rolled/added around 130 points in at a point where it should have taken a breather. That brought my largest loss and an un-needed one and it was because I deviated from a plan and tried to act on information as if it was a sure thing. Information will give you some odds but it won’t be enough to justify going outside of your risk plan. What was the other one? Well, that was when I first started trading and is too embarrassing to even mention (had to do with AAPL credit spreads and the infamous Andy Zaky)

You notice how after Dec I took two months off? Why? That was stress about the way November went.

Apr 14 – Trade Plan

I didn’t end up selling calls a few days back as my deltas were just a bit too high for my liking. We’re quite balanced on the MICs so we’ll just leave them as is. Its been an easy year for MICs so far.

I find myself looking at the market and technicals far less these days. I set my alerts and follow them relgiously and since then I haven’t really wasted nearly as much time. It’s as though I don’t even care about normal market movements. I don’t do discretionary adjustments unless its for a few units and affects little. I don’t ever get in a situation of “hoping” the market moves in some direction.

I always considered the MIC strategy as being somewhat of a glorified insurance salesmen. You’re literally selling risk while hedging it. Extracting premium out of the market. I really enjoy time decay based strategies. I’ve been doing some calendars and one day when I have more time I’ll start backtesting 9 day iron condors. Over the break I spent about 15 hours backtesting the 4 day Iron condor that Sheridan had mentioned but I just couldn’t get it to work well enough to justify.

Apr 11- Weekend post

Spy closed at 210 with RSI at 90+ which is usually a point where we see a pullback but markets tend to like extremes. I expect a pull back next week after a bit more up. I’ll probably sell two units of call put spreads to complete the put credit spreads I sold a few days ago.

In the last 6 months my account is up significantly. Had it not been for the single month of October. I’d be rocking around 60 percent. I used to be a professional gambler and made a lot of money by exploiting POSEV situations. My two biggest losses in trading had to do with my mindset of exploiting odds in a POSEV situation but with no regard to risk of ruin or how a large loss would affect my trading psychology. Trading is not about exploiting POSEV situations. It’s not professional gambling. Of course with smaller amounts it’s ok but risking 10-20 percent of your stake in a situation that you calculate as POSEV is an inappropriate move. It’s about risk management and staying psychologically fit to Stay in the game. Both situations were POSEV but the amount risked was ridiculous. I’ve learned to manage trades by plan and with variance in mind and since then I’ve kept myself out of trouble. The last six months have been a testament to following a disciplined plan. I am very happy with the results

Apr 10 – Trade Plan

MIC Update:

I only got in about 22 units this time around for RUT and about 8 for SPX. I wanted to do a bit more so I added some yesterday right at close. My ideal # would be in and around 40. It’s for May expiry which is May 14th so we’re at about the limit for entering a new trade for May. After today, the only trade I’d be entering is for June. I don’t like to go 35 days or less when entering a monthly style MIC. The ideal is around 45-50 days. We’re already profitable on both the SPX/RUT MICs for May at about something like 1-2%.

Yesterday I did add 2 units of put credit spreads to my RUT MIC to reduce the long delta I had. I don’t normally do this but I felt it was a good way to reduce delta given we have 35 days and all indicators I use suggest we have more upside to go. All of our deltas are now zero (SPX and RUT) and our time decay (theta) is nice and high. Burn baby burn.

Protector update:

I pretty much did this update yesterday, we’re sitting nicely with the protector. If I ever setup a fund, it’d be entirely around the protector strategy. It’s consistent and its conservative. To me, after my years and years of trial and error/research this is as close to “holy grail” as you can get.

Being back in Malta is nice, there’s some positives and now that we know we’re leaving, we’re enjoying it all the more. It’s truly a gem in the mediterranean. It’s got so much to see and do. Highly recommend it as a place to visit.

Apr 9 – Back from vacation

Just came back from a 2.5 week vacation in Cayman and Toronto so posting has been unintentionally light.

The account is at all time highs. Things are going well.

The MIC for March did 3.86% which I was happy about given the conditions. I probably was a bit overly cautious in the management of the trade. But that’s OK. I gather I could have eeked out about 5% with less conservative adjustments. But hey, 3.86% in a month is nothing to sneeze at. I usually leverage this about 2.5-3x

The protector is doing well considering the market is up what 0.75% since the start of the year. The hedge is down about .68% and the equities are up about 2.9%. The overall result about 2.22% up. So not only are we completely hedged, but we’re up 2.22% vs SPY 0.75%. I leverage this usually 6-7x.

We flew out of Malta and arrived in London for an overnight at the hotel. We usually do this because it’s easier with kids, we break up the trip to make it more manageable. On the way there, our kids acted like someone just released from an insane asylum, it was super bizarre. They acted like they haven’t already been on 100+ flights and that it was their first time. It was maddening. I think they were just excited to get to Cayman and see their friends. The following day, we got on the long haul in business class (using our points I acquire). I look forward to the flight about as much as the trip, I love BA business class and the service. The arrangement is pretty awesome, the kids have two seats in the middle (next to each other) and we’re on each side, it’s essentially a pod that contains all their noise and that they can move around in. They slept about half the flight while Ash and I enjoyed the free champagne, wine and food. The next day we stayed a night in Toronto and departed early in the AM on Aircanada to Cayman. Pre-market that day was quite intense, I had sold some IWM to hedge our RUT IC which proved to be an expense and the ONE adjustment I didn’t love doing. The delta would have been a bit uncomfortable and I figured it was the best move. Of course, the market rebounded very swiftly.

Cayman was awesome. Saw all of our friends, over-indulged, and got a bit fatter. Afterwards, our 5 day sin Canada were the same. Time to diet and exercise like never before.