Dunning Kruger Journal
- Thread starter maximumpossiblesuffering
- Start date
That’s a bit of an understandment. When I make calls this bad, feel free to let me have it. I can take it. Thank God my money mangement is very conservative. Only lost about $100 that day.
Although I was not really focused on trading today, some money was made fighting the trend by shorting VXX. I did have an order in for a bearish ES Option position during the European session, but I would not pay an extra $7.50 to get a fill and missed out on a pain free gain of at least a double that would have erased the previous day’s loss several times over. Such is the life of a stupid, undisciplined S**t like me.
I am going to print out a pre-trade checklist for my non-scalping trades and make sure I complete it to minimize inappropiate and costly deviations in my trading plan.
Had a reasonably profitable day yesterday although I left a lot of money on the table in single names. I was short term bullish on US equities because Japan and China markets were relatively strong on probable Central bank stimulus ideas. The Nikkei recovered all of its losses and then some from a prior session, giving me the idea this would translate to similar results for US equities. US equities ended up having a strong start only to fade by the close. BA’s new aircraft orders were disappointing and new joblessness claims ticked up. At least home sales improved a little.
My biggest disappointment on the day was VLO. I lost $.19 on a long position that ended up moving up about $2.00 after I got out. In addition, my exit was $.02 from what ended up being the low of the day. A $.19 loss can be hit in a small number of ticks at time in VLO. I am considering using a tiered stop approach on naked single name scalps and daytrades. I am generally satisfied with my money management on scalps. On that part of a trade that I may allocate for daytrading, I should position size for a wider stop on that portion. The daytrade portion stop should be positioned at the next significant price threshold, say a statistically significant deviation from the opening price of the regular trade session,
There is an strong bear case for US equities due to economic growth concerns. However, I would not get too comfortable with large naked bearish positions because rumors of loosening in Federal Reserve policy or progress on China trade talks will likely cause massive short covering rallys. Given the nice average daily ranges we have been having, scalping, daytrading, and certain theta capturing option positions seem to be an appropiate approach.
My biggest disappointment on the day was VLO. I lost $.19 on a long position that ended up moving up about $2.00 after I got out. In addition, my exit was $.02 from what ended up being the low of the day. A $.19 loss can be hit in a small number of ticks at time in VLO. I am considering using a tiered stop approach on naked single name scalps and daytrades. I am generally satisfied with my money management on scalps. On that part of a trade that I may allocate for daytrading, I should position size for a wider stop on that portion. The daytrade portion stop should be positioned at the next significant price threshold, say a statistically significant deviation from the opening price of the regular trade session,
There is an strong bear case for US equities due to economic growth concerns. However, I would not get too comfortable with large naked bearish positions because rumors of loosening in Federal Reserve policy or progress on China trade talks will likely cause massive short covering rallys. Given the nice average daily ranges we have been having, scalping, daytrading, and certain theta capturing option positions seem to be an appropiate approach.
I’ve had more time to study options strategy and to trade. in exploring various option strategies, especially longer term ones, I realize my volatility outlook is clouded. Any day, the Federal Reserve could imply they are easing up on their tighening schedule. Trump at some point could attempt to put even more pressure on the Fed that may cause speculation the current chairman could be fired. US-China trade agreement talks and rumors are a continued source of market movement. As evidence of a US slowdown increases, risk adversion should also increase. Corporate earnings will start to disappoint at an increasing rate. New orders, as we have seen with BA, will start to lag and disappoint. AAPL and F new products seem at least partially unresponsive to consumer desires and are likely to cause lower growth rates of these companies’ respective products. The brand reputation of major US companies overseas, including high profit margin consumer product companies, may increasingly suffer among foreign consumers as trade friction continues and their economy slows down. Although US banks seem well capitalized now, a fair amount of companies are highly leveraged and profit challenged. These companies may have liquidity problems in an slower economy and this may cause layoffs and reduction of capital expenditures. Bad news for caiptal goods and employment. All told, many long term strategies, options or otherwise, are out the window for me. My focus will be mostly intraday trading or maybe a small and tight out-of-the-money calendar put spread on ES. I need to be aware of the current and the potential of increasing backwardation in the volatility curve in the timing and structure of this trade type.
In the lastest market selloff, there appeared to be less liquidity in VLO to what I’ve been accustomed to. In addition, on Wednesday I noticed an apparent option mispricing on a usually reasonably active instrument. By my estimation, there was a 90% chance of almost a risk free return of at least .3% in two days. I did not take the trade because I was in a hurry and assumed it either was a stuck quote or that asset class was not going to be trading on Friday. The asset class did indeed trade on Friday and it turned out a small trader could have put on a sizeable position. This trade would have reasonably returned .5% as it turned out. Furthermore, it seems some long standing correlations between certain asset classes are starting to break down. There may be several implications for this. These implications can be either interpreted as positive or negative, depending on context. In the current context, as I see it, which includes possible market liquidity, pricing, and correlation issues when combined at this stage of the economic and market cycle are bearish. Also, most prior declines in this long term bull market have not tested their lows, that I remember, like the market is doing now. So again, the incentive for me is to focus on intraday trading is high. However, there are likely to be unusually profitable and lower risk longer term opportunities open up should correlations that are based on sound economics break down subtantially. There may be other option mispricing opportunities either at a frenzied acceleration of the next selloff, and maybe soon after, or near Christmas when many traders are off.
In the lastest market selloff, there appeared to be less liquidity in VLO to what I’ve been accustomed to. In addition, on Wednesday I noticed an apparent option mispricing on a usually reasonably active instrument. By my estimation, there was a 90% chance of almost a risk free return of at least .3% in two days. I did not take the trade because I was in a hurry and assumed it either was a stuck quote or that asset class was not going to be trading on Friday. The asset class did indeed trade on Friday and it turned out a small trader could have put on a sizeable position. This trade would have reasonably returned .5% as it turned out. Furthermore, it seems some long standing correlations between certain asset classes are starting to break down. There may be several implications for this. These implications can be either interpreted as positive or negative, depending on context. In the current context, as I see it, which includes possible market liquidity, pricing, and correlation issues when combined at this stage of the economic and market cycle are bearish. Also, most prior declines in this long term bull market have not tested their lows, that I remember, like the market is doing now. So again, the incentive for me is to focus on intraday trading is high. However, there are likely to be unusually profitable and lower risk longer term opportunities open up should correlations that are based on sound economics break down subtantially. There may be other option mispricing opportunities either at a frenzied acceleration of the next selloff, and maybe soon after, or near Christmas when many traders are off.
Attached below is ES volatility term structure for at the money options as provided by cmegroup.com. Being aware of option pricing across various expirations should help with structuring option spreads and risk management. I would like to explore the potential directional precdictability of the underlying when term structure inverts and whether it can be used as a reliable indictator accounting for context.
cmegroup has term structure charts for other actively traded products. I wonder if some trading platforms provide this useful tool automatically.
cmegroup has term structure charts for other actively traded products. I wonder if some trading platforms provide this useful tool automatically.
With the Vice Chairmen of the Fed talking a bit dovish and Trump meeting XI on trade, there appears to be good opportunities for range expansion on most futures contracts. Gold, grains, and currencies seem to have low implied volility. My idea is to enter a short gold / long calls spread and short Euro / long calls such that these positions are initially near delta neutral. A large move in either direction will be likely profitable. I definately don’t want to be short vega now and especially over the weekend.
Most profitable day for this account since inception. Now just a modest profit away from new equity highs. Now flat. Still working on my option decision matrix. My research and study in this subject has helped me to become more aware of the the questions that should be answered before selecting the optimum options strategy. Here is a list of questions I have come up with so far:
- Expected holding period?
- Directional expectation?
- Confidence of direction?
- Implied volitility?
- Expected volitility?
- Expected magnitude of move during holding period? (range expansion or contraction)
- Confidence of range?
- Perceived event risk?
- Volatility skew opportunities or concerns?
- Term structure opportunies?
- Hedging and money management plans for net short option positions?
- Long Option - Holding period 0 to 1 days, polarizing event expected, wide range day expected, Low confidence of magnitude of range, high event risk.
- Short Option - Holding period 0 days, narrow range expected, high directional confidence, undefined risk - money management plan needed.
- Long Vertical Spread - Holding period up to one month, low confidence of range.
- Long Butterfly Spread - Holding period up to 45 days, high implied volatility, expected volatility decline, possible volatility curve opportunities or issues.
- Long Ratio Spread for Debit - Holding period 0 days, High implied volatility, Low directional confidence, high magnitude of range confidence. Undefined risk - risk management needed.
- Long Straddle or Strangle - Holding period 0 to 1 days, low implied volatility, range expansion expected, Low directional confidence, positive intraday scalp opportunities, on strangles possible volatility curve opportunities or issues.
- Short Straddle or Strangle - Holding period (currently) 0 days, High implied volatility, narrow range day expected, high range confidence, low perceived event risk, undefined risk - management and risk plan necessary, on strangles possible volatility curve opportunities or issues.
- Long Overwrite - Holding period 0 days, high implied volatility, high range confidence, Consolodation day expected, undefined risk - must manage price increases and price declines
- Long Calendar Spread - Holding period to 30 days, expected volatility increase, possible term structure opportunities.
Ships passing in the night. I had the feeling that fading the rally on Monday was the sound play. A mere 90 day truce in the US - China trade skirmish is not real progress in trade negotiations. In retrospect, the above situation demanded an index put purchase or bear spread.
Maritimes's Dry Batic Freight Index and US trucking's spot loads are trending down when seasonal strengthening is the norm and are well below levels compared to a year ago.
This is a great intraday trading environment on index futures right now. I need to avoid being distracted by other instruments and things so that I can benefit from this opportunity.
It looks like a global economic slowdown is upon us. Central banks from around the world seem to have been showing increasing diligence in addressing growth concerns in their respective countries. In the US, a political battle of the budget is underway. Although there is cause for each party to stubbornly stick to a hard line, part of the Democrat's agenda seems more vulnerable to spending cutbacks. The Republicans may be concerned about political repercussions of maintaining a strong stance. This budget battle is Trump's last call in furthering his agenda. In the final analysis, the Democrats know the Republicans will ultimately cave and thus I don't expect the budget battle to go on for too long.
All in all, we are in a bear market with possible sharp short covering rallies on news of Fed easing, real trade progress, or a US budget deal. Weak economic numbers, disappointing earnings, increased US partisanship, or a not unlikely major geopolitical event will weigh.
Maritimes's Dry Batic Freight Index and US trucking's spot loads are trending down when seasonal strengthening is the norm and are well below levels compared to a year ago.
This is a great intraday trading environment on index futures right now. I need to avoid being distracted by other instruments and things so that I can benefit from this opportunity.
It looks like a global economic slowdown is upon us. Central banks from around the world seem to have been showing increasing diligence in addressing growth concerns in their respective countries. In the US, a political battle of the budget is underway. Although there is cause for each party to stubbornly stick to a hard line, part of the Democrat's agenda seems more vulnerable to spending cutbacks. The Republicans may be concerned about political repercussions of maintaining a strong stance. This budget battle is Trump's last call in furthering his agenda. In the final analysis, the Democrats know the Republicans will ultimately cave and thus I don't expect the budget battle to go on for too long.
All in all, we are in a bear market with possible sharp short covering rallies on news of Fed easing, real trade progress, or a US budget deal. Weak economic numbers, disappointing earnings, increased US partisanship, or a not unlikely major geopolitical event will weigh.
Traded better overall this week. Very close to hitting new all time equity highs for this account. Making progress on my trading "Grand unification theory" where I more consistently identify areas of positive expectation in various time frames while maintain extremely tight money management. As I gain more trading constancy, I will up my stop loss allowance per trade from my currently very conservative levels.
The old trading adage of "enter when it is quiet and exit when it is wild" has been weighing on my mind lately. I decided to informally back test this adage by using ATR (Average True Range) as a volatility indicator. I placed two ATRs on my chart with the moving average component of this indicator set at 13 periods and 1 period, respectively. The idea was to easily and quickly compare the current bar to the average range. As it turns out, the adage seemed well supported. Even more consistent performance may be realized by identifying the expansion bar type and trading accordingly.
Buying options after a series of narrow range bars along with possible catalyst seems sound. After a wide range bar, price consolidation usually follows. A theta capturing strategy is more likely to be the better play here.
In my quest to more specifically identify areas of positive trading expectations, I have tentatively identified about a dozen methods from a theoretical standpoint. As I gain more practical experience with each, I will outline them in future posts.
The upcoming trading week should be interesting. We are near apparent support after a wide range week. Do we reverse? Consolidate? Accelerate to the downside? There is a case for each possibility.
The case for reversal is based on relative money flows to correlated risk based assets such as emerging markets and commodity based futures. These markets been relatively stronger compared to US equity indexes. This is probably related to ideas of increasing Federal Reserve dovishness and rapidly declining US Government bond yields. However, I don't think we are at the level of "Don't fight the Fed" level yet.
The case for consolidation is based on static, as opposed to dynamic, statistics. Typically after a wide range bar, we enter a period of narrower range bars. The statistics on this seem less favorable be in a bear market, however.
The case for price accelerating to the downside is based on the idea that a potential economic slowdown or even recession is not even close to being priced in. Additionally, some may become increasingly concerned about recent US political developments and the ongoing US budget battle. Should we significantly breach the apparent nearby support, the technical damage may cause a large acceleration to the downside.
My low confidence belief is that US equities prices will consolidate in a range between a little below support and maybe about 2% to 3% to the upside for ES for the week. My tentative plan is to buy a ES Butterfly spread that roughly covers the US Regular Session open and about 2 to 3% to the upside. I may also sell intraday straddles and manage acquired deltas at about the 25 level. This tentative trading plan for the upcoming week is very subject to change.
The old trading adage of "enter when it is quiet and exit when it is wild" has been weighing on my mind lately. I decided to informally back test this adage by using ATR (Average True Range) as a volatility indicator. I placed two ATRs on my chart with the moving average component of this indicator set at 13 periods and 1 period, respectively. The idea was to easily and quickly compare the current bar to the average range. As it turns out, the adage seemed well supported. Even more consistent performance may be realized by identifying the expansion bar type and trading accordingly.
Buying options after a series of narrow range bars along with possible catalyst seems sound. After a wide range bar, price consolidation usually follows. A theta capturing strategy is more likely to be the better play here.
In my quest to more specifically identify areas of positive trading expectations, I have tentatively identified about a dozen methods from a theoretical standpoint. As I gain more practical experience with each, I will outline them in future posts.
The upcoming trading week should be interesting. We are near apparent support after a wide range week. Do we reverse? Consolidate? Accelerate to the downside? There is a case for each possibility.
The case for reversal is based on relative money flows to correlated risk based assets such as emerging markets and commodity based futures. These markets been relatively stronger compared to US equity indexes. This is probably related to ideas of increasing Federal Reserve dovishness and rapidly declining US Government bond yields. However, I don't think we are at the level of "Don't fight the Fed" level yet.
The case for consolidation is based on static, as opposed to dynamic, statistics. Typically after a wide range bar, we enter a period of narrower range bars. The statistics on this seem less favorable be in a bear market, however.
The case for price accelerating to the downside is based on the idea that a potential economic slowdown or even recession is not even close to being priced in. Additionally, some may become increasingly concerned about recent US political developments and the ongoing US budget battle. Should we significantly breach the apparent nearby support, the technical damage may cause a large acceleration to the downside.
My low confidence belief is that US equities prices will consolidate in a range between a little below support and maybe about 2% to 3% to the upside for ES for the week. My tentative plan is to buy a ES Butterfly spread that roughly covers the US Regular Session open and about 2 to 3% to the upside. I may also sell intraday straddles and manage acquired deltas at about the 25 level. This tentative trading plan for the upcoming week is very subject to change.
Although I have been known to analyze my losing trades like a crime scene investigation, I tend not to do this with my profitable trades. There can be be gold in analyzing winning trades, especially when things did not go as planned. There may be refinements or positive changes to my system that may be gleaned from this analysis. Below I analyze four option trades that were either closed out at a profit or are currently profitable.
A few weeks ago, I decided to buy a short term ES put calendar spread well below the current market earlier that week with the front option expiring that Friday and the back option expiring the following Monday. The basis for the trade was my expectation for a significant market decline and increase in volatility. On the second day, ES rallied 2%, but my calendar spread actually appreciated a bit. The next day, with ES market action basically a non factor, I closed out this calendar spread at nearly double what I paid for it. So I made a very bad directional call and still made money. Good money. I am now picturing in my mind that new dart board! It turns out I was a beneficiary of changes in term structure, where the very soon to expire front contract saw a major decline in implied volatility versus the next expiration series. The beauty of being aware of implied volatility term structure is that it may be useful as a sentiment indicator as well as a tool for finding trades with unusually favorable risk to reward and profitability percentage metrics.
I am currently long the ES 2675 Dec 17, 2018 put, short the ES 2675 Dec 14, 2018 put calendar spread from the beginning of this week at a debit of 2.65. In contrast to my prior calendar spread, the market moved favorably, but the results so far are only similar to my prior calendar trade. The overall small decline in volatility has been a negative, as normal with this type of trade, of course. I will may close this position tomorrow regardless of what the market does. If the market rallys, this spread becomes more profitable, but any deviations from being near the strike price are negative. If the market declines, the value of my long option decreases and the chance of favorable prices near expiration go down. The key again seems to be term structure. The volatility margin between Friday's option expiration on Monday's is still inverted and about unchanged if not even less favorable to my position. I must note however, that Friday's option series goes bye bye in two trading sessions, potentially leaving me with a put with a very low basis to hold over the weekend. My takeaway is that trader confidence is not high right now. I am not ready to use this term structure "indicator" as a contrarian signal right now because of other multiple market negatives. Although the US economy is still very strong, I may have read somewhere the market has been known to discount the future. I plan to use this latest correction as an opportunity to go short, possibly with a put purchase or keeping the long put of my calendar spread over the weekend after the front option expires.
The last two days, I have traded hedged straddles on ES and SPY. Although both trades were modestly profitable, I definately feel like a bull in a china shop. With the ES straddle I hedged my accumulated deltas using spy. The ES straddle was based on options that expired next day, and it was bit of a challenge keeping up with the rapidly changing deltas due to high, near expiration related gamma. Today, I traded a spy straddle with options that expired today. I chose SPY for Its lower notational value as a risk mitigation strategy for anticipated crazy expiration related delta swings. I need to reorganize and streamline my workflow to accomodate the particular needs of this type of trading. In addition, I really need to review my hedging strategy. On the prior trades, I managed my deltas at about the 20 level and in 10 point increments at times. I am missing a ton of positive expectation by mechanically hedging accumulated deltas. Therefore, I will give my straddle hedging strategy 20 delta of descretion for now. As I gain more experience, I will increase my descretionary amounts.
A few weeks ago, I decided to buy a short term ES put calendar spread well below the current market earlier that week with the front option expiring that Friday and the back option expiring the following Monday. The basis for the trade was my expectation for a significant market decline and increase in volatility. On the second day, ES rallied 2%, but my calendar spread actually appreciated a bit. The next day, with ES market action basically a non factor, I closed out this calendar spread at nearly double what I paid for it. So I made a very bad directional call and still made money. Good money. I am now picturing in my mind that new dart board! It turns out I was a beneficiary of changes in term structure, where the very soon to expire front contract saw a major decline in implied volatility versus the next expiration series. The beauty of being aware of implied volatility term structure is that it may be useful as a sentiment indicator as well as a tool for finding trades with unusually favorable risk to reward and profitability percentage metrics.
I am currently long the ES 2675 Dec 17, 2018 put, short the ES 2675 Dec 14, 2018 put calendar spread from the beginning of this week at a debit of 2.65. In contrast to my prior calendar spread, the market moved favorably, but the results so far are only similar to my prior calendar trade. The overall small decline in volatility has been a negative, as normal with this type of trade, of course. I will may close this position tomorrow regardless of what the market does. If the market rallys, this spread becomes more profitable, but any deviations from being near the strike price are negative. If the market declines, the value of my long option decreases and the chance of favorable prices near expiration go down. The key again seems to be term structure. The volatility margin between Friday's option expiration on Monday's is still inverted and about unchanged if not even less favorable to my position. I must note however, that Friday's option series goes bye bye in two trading sessions, potentially leaving me with a put with a very low basis to hold over the weekend. My takeaway is that trader confidence is not high right now. I am not ready to use this term structure "indicator" as a contrarian signal right now because of other multiple market negatives. Although the US economy is still very strong, I may have read somewhere the market has been known to discount the future. I plan to use this latest correction as an opportunity to go short, possibly with a put purchase or keeping the long put of my calendar spread over the weekend after the front option expires.
The last two days, I have traded hedged straddles on ES and SPY. Although both trades were modestly profitable, I definately feel like a bull in a china shop. With the ES straddle I hedged my accumulated deltas using spy. The ES straddle was based on options that expired next day, and it was bit of a challenge keeping up with the rapidly changing deltas due to high, near expiration related gamma. Today, I traded a spy straddle with options that expired today. I chose SPY for Its lower notational value as a risk mitigation strategy for anticipated crazy expiration related delta swings. I need to reorganize and streamline my workflow to accomodate the particular needs of this type of trading. In addition, I really need to review my hedging strategy. On the prior trades, I managed my deltas at about the 20 level and in 10 point increments at times. I am missing a ton of positive expectation by mechanically hedging accumulated deltas. Therefore, I will give my straddle hedging strategy 20 delta of descretion for now. As I gain more experience, I will increase my descretionary amounts.