Alpha Wolf

[BeautifulStranger]

Where has my situational awareness gone? How was equities not going up on Inauguration day? Identifying high probability, high return opportunities and leveraging them is what trading is all about. Duh. Never mind anticipating such events in advance.

I currently have two OTM 1-2-1 ‘flies in EUR calls as shown below as part of a general “Risk-on” strategy. This is a longer duration trade with an exit targeting the body at 1.2300.

Of note, liquidity in currency options was much better in the European Session last night. I’m guessing the first session after the weekend or holiday is normally slow. Therefore, this opens up more trading opportunities for me during that session.

 

[BeautifulStranger]

Good day today. Not so much for trading performance, but I became aware of the need for some refinements in my trade logic, hedging strategy, and setups. All of these aspects of my trading system are connected, so one good idea can have a big impact on my overall performance.

For my defined risk swing trade setup that anticipates corrections, I now have three well defined entry points. After a instrument goes on “Correction watch”, if the instrument displays a wide range bar that extends beyond a threshold amount from the short term moving average, my “Catch a knife” entry is on or about the close of the bar, depending on relative tick activity of the underlying. The rationale for this setup the attempt to identify an instrument that has reached “Exhaustion” or “Capitulation” and is offering a very favorable short term price for potential correction or reversal,

My second entry has much the same conditions as the first entry except there is no expansion bar. Rather, prices have continued on a steady march beyond a threshold amount of the short term moving average and appears to have entered an accumulation or distribution phase characterized by a “Flattening” of the bars highs or lows. The entry point is a bar break against the underlying trend on this “Momentum” entry.

The third entry has much of the same conditions as the other two entries, except price never reached the threshold amount from the moving average. The entry point here is a close below the short term moving average on this “Active correction” entry.

The underlying setup for my “Correction watch” uses a Keltner Channel plus a time delay before unlocking my entry strategy.

The refinements of my hedging strategy involve initial hedge size, hedge timing, and maximum hedge sizes, including over hedging strategies. More on that tomorrow.

On my EUR ‘fly, I decided to get aggressive on hedging because of risk environment changes.

I entered a ES bear ‘fly on anticipation of a correction. However, due to unfavorable tick action, I has been fairly aggressive with my hedging here as well:

 

[BeautifulStranger]

My trading results for the preceding week are as follows:

Net profit, up $220.39 or .42% of account value for this 4 trading day week.
Percent trades profitable (underlying and its hedges counted as single trade), 66.7%.
Reward to risk ratio (underlying and its hedges counted as single trade), 2.28:1.

Percent trades profitable (All trades stand alone), 50%.
Reward to risk ratio (All trades stand alone), 1.35:1.

Estimated utilization of account equity, 9%.

Largest loss (Net of hedging), $45.80 or .090% of weekly starting account value.
Largest loss (Standalone trade), $154.54 or .305%.

Although I am generally satisfied with my identification of profitable trading opportunities, my trading performance was hampered by low utilization of account equity, over hedging, inefficient hedging, and wrong position structuring for realized holding period. Several of these issues were seen in the week before this week’s results. I intend to make the following adjustments for the upcoming week:

1. Low utilization of account equity adjustment: All trading ideas, including hedging, must be structured such my initial stop loss represents $400 to $600 of account equity.

2. Over hedging and inefficient hedging adjustments: The maximum initial delta hedge is 25%. I may only perform additional “Scalping hedges” if the position moves favorably and reaches a potential short term reversal point. I may hedge up to 100% of delta exposure for no more than 5 minutes. Other than the preceding exception, I must always maintain at least 25% delta exposure on currently profitable trades.

3. Inefficient position structuring adjustments: After performing analysis between trade setups, likely holding periods, and considering reward to risk as well as costs, I will now structure my directional trades according to the following: Likely holding period less than 2 days, long call or put. 2 to 3 days, vertical spread. 4 or more days, butterfly spread. The use of butterfly spreads require a compelling, currently in play, fundamental driver. As such, my use of butterflies are more likely to be a bullish directional strategy on equities than on commodities. Should I create a portfolio of long ‘flies on equities, I may hedge some delta exposure through long ES put flies due to ES skew.

Had I implemented the above adjustments early last week, my performance, all other things equal, would have been at least ten times my actual performance. As long as I continue to identify and trade good setups while implementing needed adjustments, trading can be a worthwhile endeavor for me.

 

[BeautifulStranger]

Reviewed my trade logic and did extensive comparisons with various structures and have concluded that 75-25-5 delta ‘flies are optimal for most my trading strategies. I will be spending less on theta with my legs and have the right amount of delta versus other greeks where hedging is not necessary. A particularly important metric for some of my trade ideas is the 3 day body touch to 1 day stop loss return ratio. Further, management of an open trade is easier with it’s wider payoff area and better utilization of capital, especially when considering costs with similar exposures to my previously used ‘fly structures.

My currently open bear ‘fly was a mistake as ES had already undergone a correction. ES is still in an uptrend, although market breath is not healthy in my opinion. As long as there is money floating around, I suppose a lot of it will find its way into the market. I will probably close this ES ‘fly tonight.

I expect AAPL to beat with revenues although higher costs with widespread store remodeling in response to Covid may by a drag on overall profitability. AAPL has an impressive SOC that will likely increase the appeal of their products while potentially reducing long term costs. A upbeat AAPL earnings report may provide further encouragement for the bulls.

Notably, North American ETFs, including EWC, EWW, EWZ, ECH have sold off significantly and are at or near an area where corrections often start. I believe the outlook for energy and commodity prices are bullish as US petroleum production tapers off and monetary concerns persist. Of course, alternative energy will continue to comprise a greater proportion of global energy use, tempering fossil fuel demand than otherwise the case. This outlook does assume the global economy will grow robustly in the next few years.

Also studied concepts involving different trading environments and stock “Personalties”. My goal is to identify different trading conditions and determine optimal trading methods for those conditions. As a start, I will be looking to create a modestly net directional portfolio of using stocks with different personalities and trading strategies as suggested by my system. The end purpose is for my portfolio to be relatively isolated from market movements. I need to do a stress test using shock event scenarios causing a big spike in volatility and margin increases as because of my planned increase in utilization of account equity.

 

[caroy]

75-25-5 delta ‘flies are

So are you using this set up with a slight directional bias and target for the underlying? If you're doing 1:2:1 this is leaving you with 30 delta long or short? Is it the wider profit window that makes this more attractive?

 

[BeautifulStranger]

So are you using this set up with a slight directional bias and target for the underlying? If you're doing 1:2:1 this is leaving you with 30 delta long or short? Is it the wider profit window that makes this more attractive?

Attached below is an example profile / payoff diagram of a 1-2-1 spread based on 75/25/5 deltas. I may structure my options trades differently than this example according to opportunities in term structure, skew, and my outlook.

http://opcalc.com/lQC

The above link should show payoffs percentages by day during term of position and option moneyness.

 

[BeautifulStranger]

Account value down $350 mostly on adverse price movement on overnight position, lost on new AUD option spread, and, of course, bad timing. I am now flat.

I read another options book yesterday and although only 4 of 200 or pages had any real content, it did remind me how little I know about options and how unprepared I am to trade them efficiently. The next step is for me to finally build my option pricing and analysis spreadsheets and connect it to TWS. Other than my job, creating this pricing and analysis spreadsheet will take precedence over trading. Plus, I have some more reading to do. As such, I don’t expect to do much in the way of trading for a bit, But I will continue to update this journal at least weekly or monthly, depending on trade activity.

There is money to be made in trading for me, but no more bringing a knife to a gun fight.

 

[caroy]

I read another options book yesterday and although only 4 of 200 or pages had any real content

Curious as to what you're reading? I have a shelf full of option books and am always looking for more to read.

 

[newwurldmn]

Account value down $350 mostly on adverse price movement on overnight position, lost on new AUD option spread, and, of course, bad timing. I am now flat.

I read another options book yesterday and although only 4 of 200 or pages had any real content, it did remind me how little I know about options and how unprepared I am to trade them efficiently. The next step is for me to finally build my option pricing and analysis spreadsheets and connect it to TWS. Other than my job, creating this pricing and analysis spreadsheet will take precedence over trading. Plus, I have some more reading to do. As such, I don’t expect to do much in the way of trading for a bit, But I will continue to update this journal at least weekly or monthly, depending on trade activity.

There is money to be made in trading for me, but no more bringing a knife to a gun fight.

View attachment 249899

my advice is that fx and equities are very different products. Stick to one and get better understanding how that moves.

 

[BeautifulStranger]

Account value down $350 mostly on adverse price movement on overnight position, lost on new AUD option spread, and, of course, bad timing. I am now flat.

I read another options book yesterday and although only 4 of 200 or pages had any real content, it did remind me how little I know about options and how unprepared I am to trade them efficiently. The next step is for me to finally build my option pricing and analysis spreadsheets and connect it to TWS. Other than my job, creating this pricing and analysis spreadsheet will take precedence over trading. Plus, I have some more reading to do. As such, I don’t expect to do much in the way of trading for a bit, But I will continue to update this journal at least weekly or monthly, depending on trade activity.

There is money to be made in trading for me, but no more bringing a knife to a gun fight.

View attachment 249899

No new trades last week. Account value ended at down a little less than .7%.

Transportation and financial stocks continue to remain notably weak given perceived current economic conditions now versus 12 months ago. China reported surprisingly strong economic growth last week as well. Is it a matter of investment money being allocated towards more popular, better performing technology companies or are there concerns forming about future prospects of these significant industries / sectors of the market?

As we stand now, maritime’s Dry Baltic Freight Index is still strong, Dat Services US load to truck ratio remains strong, and my load board show record available loads of 68,000 or so as of late January. This compares with a low of about 23,000 loads in the first quarter of 2020. Presumably, the apparently strong online shopping season should have been beneficial to credit card companies, as well as continued stimulus efforts.

Not sure how much trading, if any, I’ll do next week as I’ll be working full time and reading books on options related subjects. My short term trading horizon is bearish since the week before last week’s low has been taken out, thus putting me into a “Fade the rally mode”.