spy/tlt pair trade – Travels and Trades

Oct 4 – Nice! A 1.35% down day!

Finally got some volatility.

I put on the following today:

125 ES Units of HS3 (Futures)
10 units of CC (BWBSTT) in SPX
20 ES units of CC (BWBSTT) in ES
105 ES short puts for the BSH factory
10 units of Rhino Dec
100 ES PCS ATM for Dec/Jan HS3s
Some KH in my SPX account

Yesterday and late last week

5 units of X4V14
Rolled up my CC longs for January by 100 points (nice timing!)
Throughout last few days I got on 20 units of BWBSTT in SPX

All of my Jan and Dec STT campaigns are fairly neutralized as I’ve harvested the lower part of the risk profile. Kinda love that. They still have loads of theta but downside risk is much more contained. I basically only have March STTs that have BS risk but I’ve got hedges for that.

In my ES account, I still have about 200 old HS3 units from Dec/Jan that are about 70% of profit target. I just sold some ATM PCS at today’s bottom to raise the UEl and get them less negative delta. Will be closing Dec very soon.

I added 125 ES units in March expoiration(67.5 SPX equiv) and I consider it an opportunistic trade as well as added some ES CC (STTBWB) and started the short selling for the factory. I have a factory started both in the ES and SPX.

Busy day today, the type of day where you work for your money.

Had some minor vol related draw downs but no big deal, temporary and extremely small. The X4 I put on yesterday was poor timing 🙂 That thing is down about 3k. It’s funny, I can predict what my balance would be during a 1.35% down-day almost exactly as well as the rise in balance when we have a end of day relief rally (like now).

I do have about 105 shorts exposed on my BSH factory that was borderline ready to form yesterday (wish I had) but those Dec puts will be a magnet down in value if we get any bounce and as a week or so goes by. Once they are formed, I’ll have about 100 units of BSH formed for profit.

2018 Plan

Wow. What a run in the markets. Historic on all levels. We’ve now gone the longest time without a 5% pull back. The RSI is at historic levels. The thing just won’t die. I am just glad I never got caught in the run with a neutral or negative UEL (upper expiration line) this time around. A lesson learned from the last 18 months.

I think the biggest mistakes I’ve made as a trader in the last 24 months have been approaching or erring my adjustment and entry decision making based on a positive EV (expected value) basis. I used to be a professional gambler (finding exploits in casino games both online and to a lesser degree off) and was v. successful at it (go figure, you actually can do something like that for a living). My mindset in exploiting edges carried over to the markets and it never paid off. Probably more of a function of timing and extremes in market conditions than it was on poor analysis. For the last 18 months, records and extremes have been a normality. Using previous market mechanics to game that system would be impossible. I’d use lots of technicals and market bias where the EV seemed well positive to shape my trades to err one way or the other or to time adjustments. I don’t think I was ever right. Now don’t get me wrong, only a few times did it really hurt but the other times just affected my planned bias just a bit. Nothing major. It was just an “err” to slightly positive or slightly negative deltas. A bias.

For example, we’d reach a yearly pivot point and major resistance w/ VIX at lowest in history, I’d remove the credit spread and wait for a small pull back or a cessation in the up move to take off the debit spread. That happened in October and did affect my December trade, the market screamed through and went up enormous amounts. I managed to get my PDS off but at a pretty shitty price. That was the big one. My big mistake of the year. Cost some of the profits. What are the others? Well after a big run, I’d setup the STT in a more standard format where I’d have a neutral UEL or slightly negative with some negative deltas. The market kept going up and the STT would struggle to reach target. What else? I’d try to wait for a red day to get on a PCS for upside adjustments. They mostly never came. Obviously the market is in extremes and all of these are reasonable bias and they’re only erring bias but it never worked out.

I learned from that, and now follow a no-bias approach. I set my UEL positive and I adjust based on price action and risk profile. Now I have no stress or worry about a never ending bull market. I’ll reach targets on the trades and I won’t have much to do. Like now.

I’ve gone back to basics as my mastermind group starts to go further down the rabbit hole re skew calculations (horizontal and vertical) and trying to find edges there-in. The last month or so they’ve gone so far in that they’ve lost me even 🙂 I think they’re exploring areas that are relatively untouched and I have no doubt that it will result in some quantifiable and actionable edges but a lot of it seems to be an exercise in complex analysis. But they will need to really simplify what they’re doing and it’d be for entries and adjustments. I am letting them run with this while I go back to the basics. My account size just can’t be put to use in anything but the simplest most predictable trades. The group is so invaluable and its the main reason I’ve been able to find myself in trading.

Right now, I’ve been setting up STTs much further out, a bit wider where I’d shrink the width as it ages and with the final intent to eventually convert all the STTs to a hedge structure as they approach the final 3 months. I’ve got my BSH factory running and I have other types of hedges. I’ve managed to get them to cost NIL while utilizing the STTs as a profit structure. Simple and easy. I haven’t messed about with exotic structures but eventually will on a very small non-concentrated amount.

I finally have moved into my new house and have an awesome office to work out of. It’s all coming together re trading.

Yep, it’s a game changer. Horny Communist!?

Spent most of the day backtesting and working with the group on slight tweaks to the new trade as well I looked at parameters for adjusting, profit taking, margin expansion and so on. (Some tweaks are basically using different synthetics to better the greeks and so on IE you can short the market directly or you can create the same thing with a short call and long put at the money. But you then have some benefits re VEGA (vol) if the market falls re the long put) So you play with that stuff to get a better reacting trade while keeping the profiles relatively the same..long story short—>Buh-Bye STT and BSH. This thing is it. I’m saying hi to an old friend named optimism. I was down in trading mood this week and It think it showed. I guess at the same time, I mean, I didn’t have my combos on yet (PC2) and I was still struggling with the financing and so on which there was a light at the end of the tunnel. I just wasn’t feeling it. Now I am.

Like I said in the previous posts and above which might not have been obvious, the bulk of my current trading portfolio was still in individual BSHs, STTs and financing there in, NOT combos. A true struggle it was for me. I had not gone live with combos yet (not with any large amount). Had I, it would be just fine (not close to as good as the new stuff, but good). So I’m still old school and am suffering with poor profits from being unable to finance the BSHs in this environment. My reverse calendar financing DID not do well, my NPs were barely existent in some of my BSH financing and my STTs are suffering from bizarre option skews (OTM puts holding value). This whole thing was kinda a mess and resulted from a lot of things not going my way. Still, I am profitable, I just sucked.

So right now, I mostly kept backtesting the new parameters (when do we take profit, what if we move an option here or there and so on and playing with all sorts of dates to see how to setup the profit taking in the trades and to get a feel for draw-downs and so-on. I couldn’t keep up with the developments in the group and in the trade itself re parameters. So I probably backtested this thing in various small forms across every date possible 🙂 It’s using very familiar parts that I’ve traded a millions times before, so it’s not as if its going to do something unexpected but still diligence is required. I think we’ve nailed it now.

I’ll have a solid basket of 5-6 trades all working together and I am going to go live this upcoming few weeks. I’ll be going from the cumbersome financing BSHs, STT mess skipping over the combos and into the efficient versions of said combos that have accomplish the same things with elegance and ease w/ better profiles and greeks. The key thing is these things will be a blessing to manage. Looking forward!

The title had Horny Communist in it. That might be the name of the trade variant as a member noted that the Leftie tent was so big, he kept thinking of lefties/commies and we added a small tiny horn at the front (stolen from the Rhino trade) hence the name Horny Communist :). I kinda like it. This trade mixes ATM style properties but with built in black swan protection.

Oct 28 – Update

A 3% up move in the RUT today with a 6% intraday swing. That’s giant. The trades were rocking yesterday and are now mediocre today. Makes sense, they like to be in the tent. I took some November off which was good. The extreme up move today did take a lot of the paper profits away, however they’re still all profitable though most are now sitting outside the tent. That’s OK. The 1190 area is just 12 points away and that’s where I’d expect major resistance and a pull back. I’ll adjust the December trades tomorrow to reasonable amounts to withstand a move to 1200. I’ll try to get that T+0 line nice and flat (if it doesn’t gap or run to 1190 too early) and at 1200, I’ll start to adjust enough to allow for a decent profit if the market should retrace back 20-30 points.

Today, I didn’t adjust until after the FOMC announcement and when the market fell to 1158/1160 area. Good timing but I only added 10 1160/1150 credit spreads to a remaining November trade and that was it. Nothing else was overly pressing. The deltas were good and they were just hovering around the edge of the tents. Especially the Decembers which were resilient to 1170 area. Obviously, and in hindsight, I wish I did add a few more adjustments to the Dec trades but my rules didn’t call for it. How could I expect a 2% run EOD 🙂

As For protector, I rolled my 207 puts in the protector to 208. I have 207.5 and 208s and the market run to 209 at the EOD has over-run my shorts. Protector continues to under perform everything and is down on the year.

Nov M3

P/L: 8,000

Dec Rhino

I took this at 15:30 and it had a P/L of 10,060 but I don’t know if that’s accurate. I’ll see what it says tomorrow now that RUT is at 1178. At 4:00pm it looks like pricing is whacky because it shows a 3800 P/L. Doubtful its that low.

Dec M3

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 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.

Mar 3 – Trade Plan

TLT has fallen about 2% yesterday from its Friday close sitting at 126.89 from a close of 129.5 on Friday. We closed most of the TLT portion of the SPY/TLT trade on Friday during the rise and we’re left with about 25% of the TLT portion. Not a great day for TLT but the SPY portion made up for some of the loss on the TLT. I gather we should still be able to get out of this thing at break-even or slightly below. We’ll see. TLT has about a 30% chance of double-bottoming at 126. Markets are getting over bought on many indicators so we may see a bit of strength in TLT as we start to stall in the markets and as participants start to accumulate TLT as they usually do during these prolonged topping or perceived topping patterns. After consecutive ups, SPY may spend a few weeks in a range. During this phase, TLT generally does go up because more and more people start to expect a pullback (during bull markets) buying bonds to hedge an expected pullback is a better way than to short SPY directly. Going to give what’s left of the trade a bit more time. SO hasn’t closed their trade either (100% of it). I’ve closed 70% of it.

I closed most of my MIC from February. It did well. Happy with it and the new parameters.

The MIC for March is doing well. RUT isn’t really moving all that much which is great for the trade. No adjustments required. I did enter a small amount of call spreads at 1243 yesterday and added the corresponding put spreads after it fell a bit at about 1237. As well, when it rebounded to 1242 I put on the debit spreads. When I leg in I do it with very tight stops and only small portions. If RUT proceeded to 1246 I’d have immediately added the put spreads.

Feb 25 – Trading Report

Simply said: Yellen was dovish

I watched the testimony and essentially they don’t anticipate raising the rates in the next few FOMC meetings but reserve the right too if the data supports it. As of now, the data does not support it and they do not want to hinder the recovery process. It’s unlikely that rates will be raised in H1 2015. This sent bonds/treasuries flying. TLT hit 129.5.

The SPY/TLT trade is only down about 2% now. I closed off about another 8-10% yesterday. Just being cautious. I was going to close it Friday or Monday any how. We should get out at break-even or slightly higher. If we have any luck maybe we come out with 10%. Would only take another 2 point rise in TLT.

My Feb RUT MIC is up 5.5%. I just put on a small one this time around (15 units). I’ve made one adjustment (took off some call spreads yesterday during the testimony) It was a conservative move but I felt that the market could move around pretty quickly as it sometimes does during these types of events. My short call had 1.5x in value and it was in my 1.5 week window. I followed the plan. Of course, I closed it right at the RUT peak but a plan is a plan and the trade is still up 5.5%. Any quick up move and I’ll be chilling without worry while if I hadn’t I’d be stressing overnight.

I saw some results from another person (Amy Meissner) doing the MIC trade style. I posted her results below:

She sets it up just a bit differently. She has a much lower ratio of call spreads sold. This would have helped a lot during the period she traded. The thing is, downside is easier to adjust, so starting off with less calls is kind of interesting. She uses 10 puts to 2 calls. I use 15 puts to 5 calls. So it’s a 1:5 ratio vs a 1:3 ratio. I am kind of interested in that or at least exploring using specific kinds of setup depending on the current environment situation. If we’ve just come off a big correction/drop, I’d probably opt for a 1:5 ratio but if we just came off of a large run-up and things were getting over bought on a variety of metrics, I’d probably opt for the 1:3 ratio. Right now, according to sentiment trader, we’re kind of over-bought on a lot of metrics. So I’d be looking at a 1:3 ratio setup, as an example. Each type, whether it is 1:5 or 1:3 has its own style. As long as the plan is set in place before hand, and you manage it correctly. There’s no real discretionary issues.

Her results are quite good and based on REG T margin. All of my backtesting shows around the same overall result 3.5%. Use Portfolio margin, lever it up a bit, and you’re getting 9-10% returns. The idea with that is, use less capital to get similar returns.