BlueWaterSailor: trading journey and journal

[BlueWaterSailor]

$84.65 SBUX 191025P91-191115P90/191025P80-191115P75 -$0.05
$84.65 SBUX 191025C91-191115C90/191025C94-191115C105 $0.97 $92.00
Rolled the SBUX BWB out to Nov and into a synth fly at 90 with B/Es at 86/94; total 3.25+0.92=4.17.

I usually avoid following other people's trades - this one was from Fauzia at TW - but I really want to figure out flys, so I'm taking the pain for whatever increment of learning there is from practical application. I don't think it's going to result in any sort of instant brilliant insight, but I find (with some chagrin) that putting money at risk without actually understanding what the hell I'm doing seems to be a necessary part of learning to trade for me. I can grind and grind and grind on theory endlessly, but past a certain point, until I throw myself head-first into the dark waters, it's a no-go. Fortunately, there are plenty of small and medium-sized stocks that it wouldn't kill me to own, so... it's sorta risk-defined.

(In-depth experience with naked calls will just have to wait. Synthetics are good enough for now, and maybe even forever.)

 

[BlueWaterSailor]

$148.96 IWM 191115P143 -$2.00 $50.00
20% up on a trade that far out in time is WAY over the RRR curve. The new approach seems to be working.

I'm still fiddling about figuring out how much risk I can take vs. my account size; it's... kinda nebulous. But it still has an impact, and it's interfering with my trading.

What I've been doing since the beginning is "when max notional risk is about equal to account size, stop." But that's not realistic, or even sensible; the risk that, e.g., SPY will crash to zero and leave me on the hook for the entire amount is essentially non-existent. Meanwhile, I'm holding money that's not working for me. So... what is reasonable?

One good metric is my ability to take heat. OK, that's been recently (and sharply) upgraded; I used to get pretty tense seeing a trade go $700 or so in the red - and now, that just seems laughable. In fact, ROKU was over $4k down at one point, and it was kinda meh annoying. Like having to do expense reports after a week-long trip. Point is, I now have a weird, funky mix of irritation about a trade going sideways, more irritation about not knowing everything I want to know about trading (and defending trades), and a desire to trade as much as I can but consistent with reasonable risk management practices. I also don't have any interest in using margin - sure as hell not until I have a clearly-articulable reason for doing so, which I now don't.

So how to put numbers on that? Do I just say "OK, notional risk is stupid - so I'll keep putting on trades until I'm rolled up into a catatonic mewling ball of terror"? (Yeah, right. About the same chances as SPY going to zero... less.) Until TradeStation pops up a "daytime buying power exceeded" warning? Until my BPR gets to some percentage of account size?

Hm. That last one. Maybe. Maybe.

Not quite a "hit the sore tooth with my tongue" sort of reaction, but - something in me reacted with... interest? approval? something... when I wrote that.

Will poke more.

 

[BlueWaterSailor]

Non-wheel:
$274.50 NFLX 191018P240/245 -> P250/255 $0.50
Rolling up the put side; total credit now 2.77 on a 5-point wing spread.

$293.85 SPY 191111P285 $3.05

Missed the spike in ROKU this morning; would have been nice to sell a higher-strike call at that 110.80 high mark, and maybe get out of the current one at B/E or so. Oh, well. I'm guessing I'll get lots of chances to practice this yet - this isn't the last time I'll have to defend a short-put trade going against me. I'm just being impatient because I'd like it to happen already - I want to wrestle with it, to smack it with a higher-strike call if it rallies, to figure out all the cool option-y ideas that whack me in the brain at 3am and wake me up grinning in the dark, to squeeze all the learning I can out of it - but... being stuck in it isn't awful. It's just a couple of grand that I'll have to chew out via covered calls, whatever. I'm just feeling itchy.

I guess the bigger issue here is that, for the past week or two, trading has been slower than a lazy snail on Ambien: I'm just not seeing the entry setups that I've almost come to take for granted, and I don't know why. That's actively annoying - especially since I don't have enough experience in the market to know what's "normal". Yeah, I can fall back on selling ICs and such... but that's not nearly as much fun nor as interesting as doing the wheel.

The pattern I look for, when searching for wheel entries, is a pretty simple one: high IVR/IV% tickers that are somewhere in the lower half of their longer-term price movement. Ideally, a solid stock or index that generally trades with the market but is currently on its ass. (Not like I'm asking for the moon here; that kind of price drop almost inevitably drives up the IVR, and - well, prices move up and down within some general range. Not rocket science, right?)

Nope. Not happenin'. No matter what I look at - the whole list of ETFs within the price range I like, "old reliable" single names, the list of stocks I've come up with that I wouldn't mind holding - uh-uh. ALL I'm seeing is

1) Rallies up the wazoo;
2) Sideways for days;
3) IVRs in the low-to-middle range;
4) Frickin' metals and bonds that have gone to sleep.

As the pilots in Iraq used to report, "MMOFD". Miles and miles of fucking desert.

What the heck do I do now? Call up the White House and demand a tweet storm?

...all this is a long, drawn-out way of me saying "I don't think I should have jumped into that SPY trade." It's not terrible, but... I don't love it. And the last time I jumped in based on this kind of "reasoning", I ended up in ROKU.

Hmph. Maybe developing a bit more patience would be a good thing.

 

[Wheezooo]

"I really want to figure out flys"

Highly advisable, but not as a strategy (that's simple). Look at how the flys move away from the ATM and then calculate the flys of the flys (differences of differences). Graph 'em and look at the smoothness. Then for fun, do the same thing with the term structure of a futures curve (preferably a product w/o seasonality). Believe it or not, if you understand flys well, you can trade options aggressively and effectively without any model. Although, it does get rather exhausting.

"trading has been slower than a lazy snail on Ambien"

This is when you learn the hardest thing in trading, how to sit on your hands and not force things.

 

[BlueWaterSailor]

"I really want to figure out flys"

Highly advisable, but not as a strategy (that's simple).

The strategy bit - funny that you mention it now; they're all starting to make more sense, all of a sudden. Maybe all this theoretical knowledge I've been piling up in my head is combining with the practical experience I've been getting... that sounds about right. Good grief, it's about time. Two weeks ago, visualizing how even a spread works was excruciatingly hard; a week ago, it took lots of focus and putting all the bricks in place one at a time. I won't claim that it's intuitive or even trivial now, but it's nothing like it used to be.

Look at how the flys move away from the ATM and then calculate the flys of the flys (differences of differences). Graph 'em and look at the smoothness.

Well, now. THAT was fun. So, if I have a short fly, and I turn it into a condor by adding another short fly, then add a long fly... nifty!

Although I'm not sure what you mean by "look at the smoothness". I've noticed how the T0, etc. curves and peak(s) move, which is fairly instructive - it's not obvious in retro, but starts to make sense once you've done it and thought about it - but the only time I get anything other than smooth curvature is by adding the long fly and the short one together first. Which is weird.

Then for fun, do the same thing with the term structure of a futures curve (preferably a product w/o seasonality).

I'm afraid that leaves me behind - I haven't done anything with futures at all. Would love to, but I'm not there yet. I have a rough general idea, but that's all.

Believe it or not, if you understand flys well, you can trade options aggressively and effectively without any model. Although, it does get rather exhausting.

I'm trying to picture this, but - nope, not enough of a foundation to get that yet. Damn, there's so much interesting stuff here!

"trading has been slower than a lazy snail on Ambien"

This is when you learn the hardest thing in trading, how to sit on your hands and not force things.

Heh. Thanks for reinforcing that; I've heard and read that a number of times, including from some of the smartest people in the business, and still struggle with it. Yeah... it is the hardest thing. Especially when you see all this exciting stuff ahead, and you Just. Can't. Move. toward it. Argh!

 

[Wheezooo]

I meant more along the lines of looking at the 59-60-61, then the 60-61-62, then the 61-62-63, then fly the differences of those.

Maybe in a few weeks...

You have your hands full, but are doing well. I just really took to your comment about the benefits of understanding this in everyday life. I tell people that there are 2 reasons to learn options and neither of them are to trade. One is you see life differently. Two, people don't see extrinsic value and it is EVERYWHERE.

Curious, you said you were involved in education. Literature or something? You express your ideas through writing extremely well.

 

[TheBigShort]

Hey Blue, great to see you're keeping up with this journal. It's nice to see someone on this board really trying to learn options.

I would like to save you from going down the butterfly rabbit hole. There is a ton of dimensionality and I always find that one thing always leads to another. Unless you want to trade them like dest (not an easy task), use them for 2 reasons, to be short gamma or a cheap way to place a directional bet (or both).

I thought I might write a post to help you stimulate some ideas and to help solidify my ideas. First, we need to think about what moves an asset? - New information. This can either be macro information (market risk) or company-specific news (non-market risk) such as earnings or new product releases.

There are 3 ways IMO a position vol trader should look to make money.
1) Harvesting a risk premium. This is suitable for retail traders but you have to manage leverage and make sure the risk premium is actually there. Selling Iron Condors on vol spikes (a typical retail strategy) just because of the elevated IV usually spells out "disaster".

2) Find miss priced IV relative to something else. For example, when Oil shot to the moon a few weeks ago, people should have been scanning for stocks that are highly correlated with oil but did not see a large change in their IV. This idea can also be used for term structure trades - given the first month is priced at 20% what should the second month be priced at?

3)Find miss priced IV in absolute terms. For example, if Mastercard is having their earnings tomorrow, you should see some heightened vol in Visa and SQ and obviously Mastercard. Another one would be if Mastercard is going to appear in court for a trial on December 2nd, you should see some elevated vol for that expiration.

Understanding how information (PMI reports, AAPL earnings, China GDP numbers, Court cases, Conferences...) effects individual assets is where you make the money. For example, given the PMI report is coming out tomorrow how might SPY move? How might QQQ move relative to SPY? Will the Homebuilders ETF move more than the healthcare ETF when the numbers come out? Are the options priced properly?

I have been reading Robert Engle recently and he does a really good job explaining how information flows. You should check out his work.

I am not rich so take my ideas with a grain of salt but the above concepts have served me well.

 

[Wheezooo]

"...the butterfly rabbit hole. There is a ton of dimensionality and I always find that one thing always leads to another."

Exactly!!! I told you post one, what you want out of options you are unlikely to obtain. You have the capacity to walk away with so much more. Life is optionality. Shit hitting on girls in a bar is optionality. Shes' a 75 delta, that one is a 20 delta, holy shit, look what just walked in.. way out of my league... a teenie...

Ya stand up, and your friends ask you what the fuck you are doing. And you look at them and say. "Why not, I love buying teenies, and this one's for free."

 

[BlueWaterSailor]

I meant more along the lines of looking at the 59-60-61, then the 60-61-62, then the 61-62-63, then fly the differences of those.

I think I'm missing what you mean by "fly the differences of those"; I thought I did that by rolling the 60-61-62 down to 59-60-61 and looking at how that process worked.

Maybe in a few weeks...

I appreciate the vote of confidence.

You have your hands full, but are doing well. I just really took to your comment about the benefits of understanding this in everyday life. I tell people that there are 2 reasons to learn options and neither of them are to trade. One is you see life differently. Two, people don't see extrinsic value and it is EVERYWHERE.

Ah. You've caught me philosophizing out loud. And yeah: while I am very strongly drawn to trading - my god, if anybody wanted to bait a trap for me, this stuff would be it! - I agree that the biggest lessons I'm getting are not so much about the technical or even the financial side. They're about HUGE changes in life perspective. The shocker there is how well and easily those are slotting into what I already know, and reinforcing what I already believe. I don't think it's confirmation bias, either; trading has a way of kicking your ass up one side and down the other when you're wrong, so lying to yourself becomes non-productive rather quickly.

We could go through a lot of coffee, maybe with good rum in it, ringing the changes on this.

Curious, you said you were involved in education. Literature or something? You express your ideas through writing extremely well.

[smile] Thank you. That's very pleasant to hear. Not literature, no; I'm just a computer and general tech geek with a gift for teaching, and have spent much of my life in professional education around those themes. Computer repair in the early days, programming, security, operating systems, networking, system design and architecture, open source technologies, data analytics... I'm very comfortable on a stage in front of a big audience. Might yet go back to it - people from that world have been reaching out to me, and there's excellent money in it - but I'm still just a bit too jealous of my trading time to give up any of it yet.

I do love the written word and good communication, though.

 

[BlueWaterSailor]

Hey Blue, great to see you're keeping up with this journal. It's nice to see someone on this board really trying to learn options.

Hey, TBS - great to see you here! There are a few people in this forum whose posts I read extra attentively; I've been learning a lot from yours, in your earnings thread and elsewhere.

I would like to save you from going down the butterfly rabbit hole. There is a ton of dimensionality and I always find that one thing always leads to another. Unless you want to trade them like dest (not an easy task), use them for 2 reasons, to be short gamma or a cheap way to place a directional bet (or both).

While I would LOVE to be able to trade like dest, I suspect that getting to his level of knowledge and skill (and setting aside the issue of talent, which seems to be a big factor) is a life-long task. I want to learn as much of that as I can, but... there's money to be made in the market meanwhile, and all of this good knowledge goes into the same general basket.

There are 3 ways IMO a position vol trader should look to make money.
1) Harvesting a risk premium. This is suitable for retail traders but you have to manage leverage and make sure the risk premium is actually there. Selling Iron Condors on vol spikes (a typical retail strategy) just because of the elevated IV usually spells out "disaster".

Could you explain why this is the case - other than the basic fact of HV not being a guarantee of the future - and what a better approach might be?

2) Find miss priced IV relative to something else. For example, when Oil shot to the moon a few weeks ago, people should have been scanning for stocks that are highly correlated with oil but did not see a large change in their IV. This idea can also be used for term structure trades - given the first month is priced at 20% what should the second month be priced at?

Since futures trading seems to be largely driven by this, that's been one of my secondary goals - but it's been like trying to nail jello to a wall. Whatever mental filter I'm applying to what I read isn't producing anything useful (p=0.999, with an observed t=~0 for my entire N. ) In fact, what you wrote above gives me a more solid direction than what I've been doing (looking at the news and trying to abstract something useful out of all the noise), so any further ideas for improvement would be welcome.

3)Find miss priced IV in absolute terms. For example, if Mastercard is having their earnings tomorrow, you should see some heightened vol in Visa and SQ and obviously Mastercard. Another one would be if Mastercard is going to appear in court for a trial on December 2nd, you should see some elevated vol for that expiration.

Understanding how information (PMI reports, AAPL earnings, China GDP numbers, Court cases, Conferences...) effects individual assets is where you make the money. For example, given the PMI report is coming out tomorrow how might SPY move? How might QQQ move relative to SPY? Will the Homebuilders ETF move more than the healthcare ETF when the numbers come out? Are the options priced properly?

My problem is a lack of metrics and experience. If SPY vol spikes 5% before a doubtful/bad/projected-poor-but-with-low-confidence PMI... is that good, bad, or indifferent? I'm trying to abstract a general feel for it, but again, little success.

As to proper option pricing - that seemed a bit more reasonable to start with, but I've had to lay that effort aside. Building models before I'm solid on my trading just seems upside down; without domain knowledge, I'm going to miss obvious stuff, and I don't want to build on sand.

I have been reading Robert Engle recently and he does a really good job explaining how information flows. You should check out his work.

Oh, cool - the ARCH guy. Thanks for the pointer. Although he's going to go on the second-priority pile... I'm still grinding my way through the first one (Hull, Steenbarger, Cottle, Steydlmayer, and Douglas; I take breaks from one by reading the others. And that's in addition to learning from the folks here and trying to abstract information from actual running trades. Keeps me humble for sure.)