john locke rock trade – Page 10

Aug 13 – Trade plan

These past few weeks have been interesting. On the 6th, the market fell quite a bit but we were only 3% from all time highs. There were no new headlines just the same old bearish stories (rate hikes, Puerto Rico default, Greece etc etc). I didn’t expect a full out correction because the people scared of those specific head lines had already sold long ago and we were only 3% from ATH. Obviously, the current holders weren’t too worried about those specific issues and aren’t going to sell on most news coming out of those regions. However, on Monday we had a new headline which wasn’t present before, the devaluing of the Yuan and the implications of a weakening China. These types of unexpected headlines are the ones that have the power to cause selling. It takes time to quantify the effects of a devalued Yuan and brings an unknown into the market for most participants and unknowns can cause panicked selling. I didn’t expect as strong a bounce we had yesterday and the strength of the down move usually suggests more to come. I waited for a smallish bounce to reposition and ended the day with a negative delta upside risk! Go figure! Anyways, this is a very whippy market and normally I’d be moving my delta limits on the upside a bit higher to accommodate for the volatility. However, this market refuses to correct. It had the opportunity yesterday and it decided to close green. Yesterdays action suggests more upside ahead barring no new headlines from China. It was definitely a bullish move and I’ll be taking that into consideration alongside my current thought to allow more upside room before adjusting. Confusing market no doubts.

The devaluing Yuan should help the US economy as it is a net importer so maybe this was a washout opportunity to shake out the confused and fearful weak hands for a big bullish move to all time highs?

Aug 13 – Back in Action

It was a rough go the past 2 weeks with more sporadic travel, driving and hotel stays. This put me in a constant catch up mode with both work and the market and I had little time to update the blog. I ~~should~~ will be back to regular posts and updates from here on in, probably every day.

We’re now finished the “road trip” part of the “sabbatical” and are in London, UK where we will trade in our Tesla for an american version for use in the Cayman. Tesla HQ is accommodating me in this respect and I’ll end up with a new P85D (a 3s 0-60 car) for not a whole lot more when considering the differences in the price of the Tesla in UK vs USA. It all worked out.

The market was nuts yesterday. That was a tough tough go but I am confident and proud in how it was handled. The market fell 1.6% only to rebound into the green for a 3% round trip in one single day all the while the entire market has moved 5% in the entire year! Not an easy environment for a theta based market neutral group of strategies. In fact, it was or should have been one of the toughest days a trade like that could experience.

For the M3s I added 1170 butterflies to hedge the downside and on the bounce (around RUT 1195 – an area I expected the bounce to stall) I took off some 1230s. Of course, the market did something I haven’t seen and the SPY ended up closing green on a <1.5% red day and the RUT just slightly red sitting around 1210 after touching the 1180s. Ah well, my entire account balance didn’t move to much by the end of the day (down maybe 0.5%) but the adjustments surely cost me. The size and intensity of the adjustments were nominal and probably the best case we could have expected if a rebound this size should have occurred. Can’t help but wish you were psychic and could have waited 🙂 With a fall that intense, you have to manage your risk and it is what it is.

The AUG MICs were mostly closed on Monday (thankfully). Some straggling parts to close out today. Will post the results soon. All positive.

The SEP MICs had debit spreads and bearish butterflies added to them on the down move yesterday and are probably around break even so far for the month.

Come Sept 1, I’ll start posting all my trades and adjustments as they occur.

Aug 1 – Trade Plan

I’ve officially added the M3 trade into my larger portfolio. I find it a much more conservative trade than the MIC in terms of risks, but strangely it should produce slightly better results, which is quite interesting. It’s also a lot less stringent on timing of adjustments and more forgiving in general. From a direct comparison to just the mechanics of the trade vs the MIC, it is a better trade overall. The edge for the MIC is my experience managing it. Either way, it’s a nice strong compliment to the MIC. The M3 is a trade John Locke developed when he was at the Sheridan mentor program. He’s since branched out on his own. It’s 10 bearish butterflies coupled with 1 long call thats DITM as to have no time value. It’s a market neutral time decay based trade. It’s got very little upside risk, and the downside adjustments usually occur when the trade is already up money and when the butterfly is close to its max value for that specific time in the trade. That’s neat.

Theoretical backtesting of the MIC in a strictly mechanical way produced an average of 3.3% a month since 2008, where the M3 produces an average of about 5% per month. However, with active management of the MIC and use of several indicators, I gather I am closer to 4%-4.5% over time.

For a neat look as to how well the M3 handles any market environment, in 2011 if you had put the trade on at the top of the market and had it on through the huge 63 point down day (what was that 8% down day?) and all the way to the bottom (~200 points??) and its subsequent rebound, the trade still came out at a win of the target 10%. That’s a resilient trade. This was managing the trade by checking only once per day at 3pm. That’s it. No intra-day adjustments besides that. Even during that 63 point down day, it was still up money.

Come September, I’ll start posting my trades and adjustments.

Jul 29 – Trade Plan

The protector Alpha is up 3% for the year vs SPY ~1.3%. We got hurt a bit on the last whipsaw. I had reluctantly rolled my 211 short puts to 213.5 when the market was at around 213 for a loss having missed the big upswing and thus losing on intrinsic value. The market moved very quickly and I just couldn’t stay up on it (overnight gaps etc). THEN the market decided to suddenly reverse falling to 206 leaving our 213s with no extrinsic value. Talk about whipsaw. I then rolled to 211 to get a bit of extrinsic now it’s on its way up again. I do believe this is a bounce into fed Wednesday and that we may stall or reverse hard but I’ll be sure to quickly roll if we come near 210.5. Not a great environment for rolling the shorts. That and the big loss NEM had (was actually -15%) has put our PA account at just about 3% for the year. Leveraged 7x = 21% or just about 3.5% a month for the year. This is better than expected given the market this year. This is a bullish strategy and has its place in our portfolio. It does well when the market does well yet is completely hedged on the downside. It’s not the big returns you’ll see in the market neutral options strategies but it’ll help in big bullish years. Maybe those years are behind us in the next 5 year time span? I don’t know.

My balance moved up 5% yesterday after the fall in volatility. Again, it shows how the mids and stated option pricing moves around so much in high volatility environments. It’s like the volatility was just sucked out of my accounts yesterday. It wasn’t delta losses or actual losses, it’s just that when the volatility floods out the MID pricing gets tighter and more accurate especially in the SPX. This can affect your stated balance (AND margin calculations quite a bit). Any new traders utilizing portfolio margin should be aware of this. You can go to bed with PM stating 100k liquid only to wake up having it show -100k and be forced into liquidations. It’s happened to me in my early days running MICs. You end up buying back risk at a premium during the first 15 min of market open. Not pleasant. There are tricks to reduce margin during these 15 min but that’s a subject of another post.

Some early results:

Aug Bearish butterfly: Up about 15%

Aug M3: Up about 8%

Rock Trades: up about 4%