Alpha Wolf

[BeautifulStranger]

Will be starting a new journal for 2021.

I will be adding a relative performance metric to my trade selection, hence this thread’s name. To help visualize relative performance, I will be charting pairs of various instruments, especially with SPY. Further, I may chart other combos as various investment themes and ideas develop, such as profitability models of industries or single names using market based inputs.

I will be comparing the relative performance of SPY with different asset classes, with sectors, with select industry ETFs, with select foreign ETFs, and with select single names based on their average option volume, price, and beta.

Obviously, I could simply compare % change on day and % change relative to opening for an idea of relative performance, but I wanted to be able to review historical performance, use technical analysis, and possibly apply a indicator or two in preparation for coding for backtesting purposes.

I will be using option spreads such as directional butterfly spreads for my alpha based delta while partially, but dynamically hedging these deltas using ES directional butterflies, especially if put skew persists.

 

[.sigma]

Damn, everyone's making journals now.

Subb'ed!

 

[BeautifulStranger]

Damn, everyone's making journals now.

Subb'ed!

Its that time of year, I suppose.

You are becoming quite the authority on options. I hope to lean on you with a few deeper questions after I clear my early afternoon, post Friday night, mental fog, perhaps sometime in 2021!

Most of my trading in this journal will be based on the three following categories of setups:

1. Reversals - Short term moving average > 5 ATRs from long term moving average and loss of momentum versus underlying trend. Target will be 8 to 10 ATRs, stop will be 1 1/2 to 2 ATRs, approximate probability of profit 45%, Average holding period of losses, less than 1 day, average holding period of profitable trades, 2 days. Trading vehicle of choice, 45 delta long naked options with end of current week expiration.

2. Breakout - A underlying with a recent compelling event after a inside or narrow range week combined with an expansion bar will considered a two to six week opportunity, depending on underlying direction and significance of event. Depending on implied volatility levels, significance of event, skew, and confidence of target, I will either chose a 40ish delta long option or OTM butterfly spread. Stop will be new daily high or low against position plus 1 to 2 ATRs or next day if previous day’s high or low is taken out on gap and price moves 1 to 2 ATRs adversely versus open. Target and estimated holding period to be defined when reviewing potential setup. Approximate probability of profit, 50%, estimated risk to reward ratio, greater than 2. I anticipate the vast majority of my breakout trades to be bullish. While my obvious objective is to outperform the SP500 index, since I’m using leverage through options, should the general market move against my position(s), some active hedging would be prudent to manage short term profit and loss swings.

Although iron condors on indexes have underperformed in 2020, I will be looking to selectively put on iron condor or Iron butterfly ladders on high IV rank single names using a small, dedicated amount of my account. Initial duration will be usually be from 6 to 8 weeks. Wings will be about 5 delta, trade management will be dynamic based on then current technical, significant events, time to expiration, price relative to body, changes in IV levels, and risk to reward considerations.

There will be a few other trade ideas based on extremes of sentiment as may be indicated by large changes in put to call volume. Most of these trades will be short term reversal plays, utilizing long options.

 

[BeautifulStranger]

Will be trading a new live account with a $50k starting balance. Blowup is intraday balance below $40k, failure of purpose is underperformance of SP500 at the close of a quarter. Either of the previous situations results in account closure. On positive weekly performances, my reward will be posting a wolf meme.

Trading in 2021 is likely to be different than in 2020, with less follow through to upside breakouts being a major feature. I am assuming volatility will remain above historic low levels due to conflicting economic growth prospects, increased investor attention towards alternative assets, and a small shifting of geopolitical attention from major powers towards certain smaller powers.

Although I will not be trading this week, looking at BRR and precious metals last year and the start of this year lends strong support to investor interest in alternative monetary assets. What seems like almost continual Federal Reserve stimulus suggests concerns over risk of purchasing power loss associated with maintaining a net monetary position. In other words, if one has low yielding savings, use it or lose it (to asset inflation).

Grains have experienced a counter seasonal rally, historically associated with a extended move in the summer, although the US contribution to global grain production has declined from yeas past. Planting intentions and weather reports in the Northern hemisphere will likely create even greater volatility in the future. A lot has to go right for supplies of grains to not reach low levels.

Stock index futures look bullish to me on the short term, but there are no compelling trades from either side for me. Some of last year’s high flying stocks such as DOCU, CVNA, AAPL, FDX, ISRG, NVDA, and FDX that have sold off towards the end of 2020 could very well start out strong in 2021, especially during the first two weeks.

I see CL in a wide trading range on it ping ponging between shifting economic outlook and associated demand uncertainty, continued government stimulus efforts, and with the usual geopolitical risks.

 

[BeautifulStranger]

Will be trading as soon as this Monday.

As of this weekend, I am looking at several instruments particularly closely for various setups next week as outlined below.

My short term, typically 2 days, correction setup attempts to identify extreme sentiment levels combined with changing momentum against the underlying trend. While probability of profit for any given trade for this setup is about 50%, reward to risk is often better than 3:1. Further, the use of a breakeven stop after the second bar improves overall performance as price stagnation or consolidation most often precedes continuation of the underlying trend. The following instruments I’m following for this setup for downside correction: WTI Crude (CL), Bitcoin (BRR), ROKU, TSLA, UNP, CSX. Upside correction: JPY, ZN, GC, SI, UPS, FDX. By the way, I expect UPS and FDX to have particularly favorable earnings reports in the next few quarters. Note: BTT does not have options, so I will monitor, rather than trade it, for statistically related reasons.

Not all of these instruments will trigger a setup next week.

I will be using defined risk option positions, structured according to the underlying’s 3 month IV rank. Depending my net correlated exposure to moves in ES, I may hedge to varying degrees in certain market conditions rather than closing out multiple positions at one time. As long as my hedged positions have relative strength and convexity on their side, major adverse index movements should not be too much of a worry.

Possible early trend change setup is Chicago wheat (ZW) to the downside.

Possible trend continuation setup is EUR to the downside.

Most trades will be closed by the end of each week, with the exception of early bullish trend changes involving single names.

I will be providing specific information on actual trades taken, more or less real time, with screenshots on after the close on Friday.

 

[BeautifulStranger]

Not much trading today as there was an unexpected meeting.

I went with 10 DTE options instead of my usual 5 DTE because I’m looking for more sustained moves in my single names. On FDX, the 13 week volatility rank was very low, making the 2-3-1 structure more desirable should IV pick up.

With FSLR, I decided to do a 1-2-1 fly because the 13 week IV rank was roughly mid range.

After I put on the single name flies, I became bearish on ES because of price action and lack of follow through on an early rally. I changed my mind after no follow through developed to the downside and several stocks on my watchlist were up big, suggestive of continued trader interest in risk taking. I conclude Monday’s price action in ES represents consolidation in a up trend. Assuming a favorable price action the above single names, I expect to increase my position size in each and may have add new trades. Generally, I want each full size option trade premium to represent 5% of capital, or about $2500. Total premium can be up to 50% of account value, with partial directional exposure hedged.

Noteworthy is I was given price improvement on both of my stock option trades, suggestive that I left money on the table on entry, assuming each of the opposing order algos met each other half way. This is in spite of my testing the market with conservative limit orders. Watching the inside market react to my small orders and my fill history suggests it may be worth being patient on execution for at least a portion of the order. Further, I can see the benefits of creating a custom order algo that can capitalize on my observations. In addition, such a custom algo will free my attention for other trading opportunities, especially important early in the session.

I expect to post a least weekly to this journal, especially after Friday’s close.

 

[.sigma]

Curious why you chose those underlyings (FDX, FSLR)?

too illiquid for my taste, your ITM wings have OI <50, was it easy to fill?

 

[BeautifulStranger]

Curious why you chose those underlyings (FDX, FSLR)?

too illiquid for my taste, your ITM wings have OI <50, was it easy to fill?

These are OTM flies. I did several cancel and replace orders to see if or how the inside market would update before getting filled. FDX and FSLR options have decent volume when these stocks are “In play”.

FDX seems to have a solid fundamental story that I can monitor on a daily basis and my FDX indicators suggested FDX was in an area where corrections often start. Basically, I am bottom fishing with FDX at this point and will need to see a increase in relative strength versus SPY tomorrow to justify holding the position.

FSLR is more speculative on a fundamental basis, but the political climate is favorable for green technology companies and I expect there to be major green energy projects announced in the coming weeks.

I have thought about trying to leg in my positions for potentially lower costs, especially when putting on multiple contract order sizes. Another idea is to simply go long a naked option or enter a simple vertical spread on lower volume option series.

 

[caroy]

On FDX, the 13 week volatility rank was very low, making the 2-3-1 structure more desirable should IV pick up.

Enjoying your journal. Curious if you have a rule of thumb for when you favor which structure 1:2:1, 1:3:2, or 2:3:1 on the flies? Here you're saying lower IV for 2-3-1? Trying to figure the reasoning behind my own fly set ups.

 

[.sigma]

Enjoying your journal. Curious if you have a rule of thumb for when you favor which structure 1:2:1, 1:3:2, or 2:3:1 on the flies? Here you're saying lower IV for 2-3-1? Trying to figure the reasoning behind my own fly set ups.

I was going to ask something similar. He mentioned low IV rank being the culprit for the 231? Trying to figure out why?