Travels and Trades

==Market Open Update==

The market opened up kindly for us.  We made some small adjustments on both the RUT and SPX MIC at a good price as both rose.  We’re now delta neutral for both with a very large  THETA (time decay) PER day heading into the final weekend.  We’re looking good. RUT has no upside risk as we’ve removed the call spreads.  SPX has very little upside risk (45 or so call spreads still on).  We’ll be holding till Monday but at end of day today we’ll be adjusting so we enter at relatively delta neutral with a large window to alleviate as much risk as possible heading into Monday.   Hopefully it’s a stress free final day of market risk for this month

==1030am Update==

Today (Friday) should be challenging. The futures are down 19 points. Yesterday opened at 2032 and within an hour hit 2055. That’s a large move up. Then it proceeded to fall all the way to 2031 by market close. A complete reversal (see white chart below). We’re looking to open around 2019.  From yesterdays peak to trough that’s about 40 SPX points in a few trading hours. We’ve got an adjustment to do around the 2020 mark.  We’ll add a full debit spread. If it opens much lower, we’ll buy back some puts on the credit spread. That’s the most aggressive adjustment. We’ll gauge on open.  I don’t love doing this so close to the end of the trade but it’s necessary.   The next adjustment point would be 2010.   We should be able to get most profit out at about 2012-2040 range on Monday, Not an easy environment for the MIC especially so close to the expiration but it’s better than having opened one a week or two ago.

Well,

That was a first for me and I’ve seen a lot these past few years.  The size of the swings and the timing is quite astounding.

Luckily the whipsaw did not affect our position directly since it was so close to the end and we had a huge range and we hadn’t needed to adjust. However, the volatility increase is making it annoying to close the trade. We’ll likely need to wait until Monday or Tuesday.  As theta and vega start do deflate from the trade. We have that luxury with the trade being so delta neutral.  Right now there is a lot of fear in the market and it reflects in the price of the insurance we sold despite it being very close to expiry and far away from the strikes. Friday and the weekend should deflate most of that value away. We’ll want to enter the weekend fairly delta neutral as a way to mitigate all potential risk.

I am excited to close up the year and reset my trading portfolio in January. It’ll be both a lot less active maintenance and a lot more diversification. This year was an active trading year as I was nearly 80% MIC and heavily focused on small active adjustments to avoid whipsaw. This backfired in the huge 250 point run we had from 1820 to 2070

Modified Iron condor (MIC)

The MIC is a non-directional strategy where you sell both ends of the spectrum and buy insurance in the middle. Essentially, you’re a market insurance salesmen. The upside is usually the biggest problem with the MIC and the anchor likes up, so they tend to hedge each other. The EV trading loves volatitlity increases and helps on the down as does the standard adjustments you’d do in the MIC. Down and up are generally covered.

This is how you’d setup an MIC

Setup:The shorts start at approximately delta 8-10 and are 20 wide. The call side

is uneven and typically one unit represents 5 on the call side and 15 on

the put side. To balance vega/delta further I add a close to ATM put

debit spread and 2 black swan puts. The call spreads are smaller because of volatility

skew and it makes it easier to manage on the upside.

Adjustments are made at 20-25 delta.  Essentially you sold insurance on both sides for a significant amount and through the month you manage your delta (risk).

On the upside an adjustment would remove a portion of the call spreads

on the downside an adjustment would be to widen the debit spread, buy

more debit spreads OR buy a long put in a fast declining market

Example:

Sell to open 15 January 17 2014 1025 put

Buy to open 15 January 17 2014 1005 put

Price: $.90 credit

Sell to open 5 January 17 2014 1200 call

Buy to open 5 January 17 2014 1220 call

Price: $1.15 credit

Buy to open 1 January 17 2014 1125 putSell to open 1 Jaunary 17 2014 1105 put

Price: $6.65 debit

Buy to open 2 January 17 2014 920 put

Price: $.90 debit

RUT at 1128.  This represents 1 unit.

Wow, what a day in the markets. It was one of the worst days of the year. The SPX fell 2.5% from peak to trough and the VIX surged 25%. Something you don’t often see is the TRIN exceeding 3. The Trin measures the advancing vs declining issues in the market. When it’s this high it usually signals a reversal on oversold conditions.  7/8 times it’ll reverse. Though it can also signal a big fall (2008/2011).

The volatility increase caused a temporary loss to our MIC. As volatility surges and unsurity increases, our way out of the money credit spreads increased by probably 3-4 fold. We’re still a very far way away from our spreads so we’ll just keep adding debit spreads until Monday if the market should continue to fall. Volatility will have less and less of an affect as we’ve only got 5 trading days left in the month. It’ll quickly dissipate and resolve and all the while our theta is very high. We’re likely holding till Monday unless we have a huge up day on Thursday or Friday along with a volatility collapse. Managing risk over the weekend is key. We’ll want to make sure our delta’s are close to even and make sure we’ve got a nice long range. We’ll let theta and vega work to our favor.  As it stands now,  our curve is quite safe and our deltas are just slightly positive. All in all a great position to be in. Both our debit spreads and the credit spreads should profit resulting in a nice gain on the month.

I took the down turn as an opportunity to sell some of my year out puts used in the Anchor. This is in prepration  to rebalance for our January trading portfolio. It would seem I was a bit premature. I sold about 10% of the puts at 205 and the spy reached 202.98.  Ah well.

Today I’ll be just managing our deltas and make sure there is no great exposure.  I’ll be on high alert today.

Update: A market breadth indicator I use has triggered a short at spy  205.4 with a target of 204.9. I’ve sold 2k shares of spy and put an auto close at 204.9. These trigger probably 25x a year and are good for about 25-30% return unleveraged.  They usually trigger 5-10 min after market open.

**Update 2** I closed at 204.92 and we made out with ~1k profit

I’m in the midst of rebalancing for the month of January.

I’ve decided to do

25% Modified Iron Condor

25% TLT/SPY Pair Trade

25% Anchor

15% Momentum

10% Volatility

I’m overbalanced in MIC and waiting for the Dec trade to close this Friday or Monday (latest). I expect to do about 5% on that trade. Once this closes, It’ll release a lot of margin which I’ll use to enter momentum, another MIC and the rest will be dry powder for the next TLT/SPY pair trade.

I had a margin issue yesterday that imbalanced me on the anchor trade which I have to correct. It’s an issue of being over leveraged without accounting for large volatility increase which can throw off the portfolio margin calculation that occurs every night.  The solution! Less leverage!  There’s nothing more stressful then being caught up in trying to become compliant during the first 15 minutes of trading. It throws everything off. You end up chasing to correct offset the entire day.  Won’t happen again.

Right now I am in the TLT/SPY pair trade, over balanced in the MIC trade and slightly overbalanced in the anchor trade. The MIC overbalance will be corrected within the next 2-3 trading days as we exit the position.

I figured it was about time to start sharing some of what may be an unorthodox lifestyle. I do a lot of traveling and a lot of trading.  This blog will document my trades and at times my travels and the challenges therein.

Trading

I typically follow a non-directional trading style having mostly traded a few strategies

1. Modified Iron Condors (MIC)

2. Earnings related volatility trading

3. Fully hedged Anchor strategy for a long term portfolio

My focus and research/backtesting has been focused on how to maximize leverage in a safe/conservative way.  I’ve determined that non-directional strategies tend to work best for this.

Modified Iron condor (MIC)

The MIC is a non-directional strategy where you sell both ends of the spectrum and buy insurance in the middle. Essentially, you’re a market insurance salesmen. The upside is usually the biggest problem with the MIC and the anchor likes up, so they tend to hedge each other. The EV trading loves volatitlity increases and helps on the down as does the standard adjustments you’d do in the MIC. Down and up are generally covered.

Recently, I’ve decided to further diversify and am doing somewhat equal parts of MIC, Pair trade credit spreads of TLT/SPY,  LC 15M (momentum based trading style based on Meb Fabers research), Volatility trading and finally the Anchor strategy

1. MIC

2. TLT/SPY Pair trade

3. LC 15 M (Momentum)

4. Earnings volatility trades

5. Anchor Strategy

My belief is that this will end up in a very well rounded leverage based trading portfolio.

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