Alpha Wolf

Had an interesting conversation yesterday with someone I hadn’t talked to before from Illinois. While we did not talk about trading, there were definitely applications to trading and our economy. A quick summary is I should never take anything for granted and to actively reexamine my assumptions on a periodic basis. Attitude adjustment accomplished.

I should have a more predictable, less intensive schedule with my “Gig” within a gig, allowing for more trading. For future trades, I will contemplate and record my outlook on price, timing, and volatility as well as the basis for my trade.

I have the idea that emerging markets may get renewed investor attention. A few dollars transferred out of TSLA alone can move some of these markets.

On a RTM play, I bought a “Directional” EEM March 26, 53/55 short strangle at -1.55. 13 week IVP is 90% and this position is small enough where I am comfortable going naked, thus avoiding paying for expensive wings. My hard stop is theta becoming negative. My target is the underlying price touching the short call strike, whenever that may be. If none of the preceding events occur, I will use shorter term exit signals as expiration approaches. More details later.

Edit: My stop loss idea is wrong. Will review and adjust later.
 
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Account returns to profitability on more active trading. Had a less hectic week at work, allowing more time for trading.

I thought about my setups and inputs into my trading decisions. I feel I’ve not only plugged a major trading leak, but now have a new setup idea. There are also some refinements for existing setups as well as several trading concepts being explored further.

I used to get caught badly on reversals, resulting in the majority of big losses. Diligently evaluating risk to reward based on support and resistance levels or some other methodology, allows me to reduce exposure to adverse price expansion events. Further, having a methodology of taking profits once certain, statistically validated thresholds are reached, reduces exposure during situations of negative expectation.

Several trading concepts impacting my trading were “Impact and durability” of expected news events, such as the passing of a new economic stimulus bill. I was surprised by the magnitude of the move in equities markets after this seemingly widely anticipated news. I would have expected less price follow through. Also notable is the seeming lagging performance of risk based, non equity assets. Are rising interest rates, even though rates are still closer to multiyear lows than multiyear highs, weighing on sentiment of these asset classes? When will equities valuations start being affected?

Another concept revisited is the “Character” of a single name or even a market as well as character changes. I use indicators to “Quantify” character for my trading decisions to answer such questions as “Where should I place this trade”? “How much leeway should I give this idea”? This is adjunct to technical analysis where I try to get a sense of the likelihood of an underlying “Respecting” support and resistance levels or its “Persistence” of momentum, and the like.

The most important consideration for my trading is to be more consistent in identifying significant levels and placing limit orders in anticipation of these levels being hit. My reward to risk will be improved while at the same time reducing my feeling of having to constantly monitor the market.

I will be increasing the time to expiration on my option spreads from 1 to 2 weeks to 2 to 3 weeks to make position management, including active hedging, easier.

Attached below is a partial list of this week’s trades. Nothing noteworthy was omitted. For whatever reason, TWS is not consistently displaying the closed results of all trades:

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No trades this week. Busy as hell at work, but for being in the top 1% in earnings nationwide for three consecutive weeks, I’m not complaining. With all the money I’m saving, there is a portfolio margin account in my near future. All that is needed next is me learning to trade!

Still, should have taken a few early week reversion to mean trades in NG and RTY. RTY almost did a “Coast to coaster”, although measuring by ATRs, RTY basically did. I didn’t take the signal because of my macro opinion and very limited ability to watch the position. Several very successful traders have mentioned they don’t give a damn about the macro environment for at least most of their ideas. I am increasingly seeing why, but there are relative strength related opportunities generated through divergence I like to be aware of. VXX signaled a reversion to mean trade, although initially, some heat would have been felt. Typical continuation trade ideas in EUR and AAPL would have showed losses. Buying ES puts while VXX was in reversion territory, would have been the best play in my book.

Speaking of AAPL, Steve Jobs is alive and I have proof. Sure, I may not be able to produce a live body, but Steve’s essence at Apple lives on, as seen with the continued exceptional product development at Apple. Perhaps Steve developed an AI version of himself that uses his methodologies. Case in point, I personally saw watches as being hopelessly obsolete. However, with current and new expected health related features as well as being a device with backup communications capabilities, I actually see myself buying an Apple watch. Unfortunately, battery life of a little more than half a day is a major detraction, especially considering the adverse effect of frequent deep depth of discharges on long term battery life. I am not interested in buying a new watch every year or even taking the time and paying $50.00 or whatever, to replace the battery. In addition, there is little reason to pay for a premium band more than once, assuming one is desired across several generations of future watches, limiting potential product margin potential. A premium watch face seems like a particularly dubious value, especially in case of frequent replacement cycle.

I will probably own every major Apple product in their lineup from their watches, iPhones, iPads, MacBook Pros, and their desktop computers with the new M2 chip by the end of this year. This is coming from a picky buyer. Sorry, Intel. Sorry, Microsoft. Whether AAPL stock as a great long term buy a current valuations may be debatable, but I expect there to be a string of AAPL earnings beats, especially versus many current analyst estimates, likely creating solid trading opportunities in the next year or two ahead.

The Fed, among others, has the tricky task of maintaining consumer, business, and investor confidence. Current historically high debt levels increases systemic financial risk should a recession hit. Macro policy involving monetary policy and stimulus packages certainly seems to make sense given recent events. May our productivity catch up those previously mentioned “Investments”. However, how to handle increased coordinated risk taking that may serve to destabilize our financial markets and may even lead to hurting our economic recovery? Perhaps some micro-management is the answer. Leverage, short selling, float, and volatility thresholds could be lowered before leverage restrictions along with additional leverage related fees are applied. Perhaps underwriting standards for residential and commercial mortgages be slowly phased back in before debt quality declines to “Toxic” levels. <Grin>

I believe a long sustained economic recovery would be more beneficial for our financial system than an extreme, but relatively short lived, boom. Fortunately, the US economy seems to be firing on most cylinders right now, including freight transportation, homebuilding, energy, both fossil fuel and alternative, retail, the military-industrial complex, and even farming. Restaurants and hospitality are getting some help in the latest relief bill, improving their prospects as well.

Overall, I have a bullish economic outlook for the US over the next few years, although with capital flows increasing towards low labor cost third world countries, probably creating outsized investment return possibilities versus the big developed economies. Monetary concerns should persist, but may be tempered by increasing costs of capital. Equities will probably remain “The best game(Asset class return persistence and predictability) in town. Overall, the Biden Administration appears to consist of mostly competent and dedicated individuals, increasing confidence for all, especially if divisive partisan politics does not become front and center.

Next week will be extremely busy for me as we are preparing for a three week project. Once this project is running smoothly, perhaps by the week after next, my hours will be more predictable, allowing me to feel more comfortable with short term trading.
 
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I am increasing journal account risk allowance as seemingly justified by improving trading performance during the last few weeks. My risk allowance per trade is now $250, net of hedging. Each profitable trade will increase my risk allowance by $50; each loss decreases it by $25. Should I reach a risk allowance of 3% of equity, I will reassess my risk management plan. Since I use a time stop on most of my trades, a significant number of stop losses will be less than my allowance, making determining optimal risk allowance per trade challenging.

No compelling ideas so far for early next week, but am bullish on equities. Looking at store and road traffic patterns as well as freight movement, suggests the US economy is going into overdrive. Will probably have to wait until US session, at least, before any setups reveal themselves, assuming I not slammed at work, of course.
 
Another busy week, but fired off a couple of trades early on. The M6A trade was partial hedge placed while I worked a related options order that ultimately never filled. The trade on CL is a good case study in several respects and will go over it in next post. “For the wont of a eighth, a kingdom was lost”. Didn’t quite lose a kingdom trying for a tick improvement on my CL spread on Tuesday, but did see 28 ticks in heat at one point. More details later, but got to go.

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The M6A and CL fly trades were reversion to mean ideas. Although both did partially recover after establishing my positions, the recovery was more of a dead cat bounce rather than a solid rally. I only had about 5 CL delta of exposure, but crude dropped over 6 1/2% the next day breaching its recent low and briefly exceeding my current risk allowance. I actually thought about covering my short calls, effectively increasing exposure (Adding to a losing position) that would have given me a opportunity to save more than a double with crude’s subsequent, and expected rally.

While my trading judgement has been reasonably sound in the last few weeks, there are some aspects to be reviewed. Top of mind, these aspects are:

1. At what point should I manage a position that shows anomalous behavior according the expected pattern progression? My definitions of what constitutes a setup, its entries, and its exit need to be more specific.

2. All trade sizes or instruments should allow for dynamic hedging relative to my current risk tolerance because I have been doing well identifying short term corrections, at least when I’m able to watch the market. Crude, with its “Big” mini contract makes it hard to manage deltas within my risk tolerance. In the alternative, I could structure my options spreads differently. I will explore the idea of managing my exposure to various Greeks with other option positions, when I get a better intuitive understanding of how options spreads will move as the underlying and IV changes.

3. Some setups, such as reversion to mean strategies, may lend themselves well to scaling ideas. I need look for “Optimum F” of various entry signals and scaling. On the one hand, I don’t want to end up with too little capital allocated on a one-way winner, but I also don’t want to end up with adding too much capital to an eventual loser. I need to spend more time deriving the nuances of various setups to increase the efficiency of my trading. An example would be expectations relative to “Stage” of an established trend or setup.

4. I will take care in specifically identifying my performance according to setup type: Reversion to mean (RTM), reversals, or a counter-trend expansion bar (Trades that do not otherwise meet RTM criteria), and trend (Continuation) trades. On trend trades, I need to categorize performance on those trades entered on seeming consolidation bars and those trades entered on an in-trend expansion bar. Of course, in addition to the aforementioned criteria, I need to track the performance of any other criteria used for my trading decisions.

5. When I have very limited time to trade, it is probably beneficial to increase the DTE of my options spreads. However, most of my setups are suited for a 1 to 3 day time frame, making shorter term options potentially most efficient. One idea is to simply trade one setup, saving time in the search for ideas. RTM trades ideas are very simple and have a high win %. As long as RTM ideas are kept as defined risk with not too much capital allocated to a single idea, I should do well, even with limited time to trade.

Ok, that settles it. This journal will now focus on RTM strategies exclusively, using short term option spreads that expire within 3 to 5 business days, if such option series are available.

I willing be posting the performance of the account associated with this journal since inception, using IB’s Portfolio Analyst, after the first quarter ends on 3-31.
 
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