Dunning Kruger Journal

[maximumpossiblesuffering]

Been going to a lot of presentations by real estate investment and mortgage companies. There has been a significant, year over year, slow down in the Dallas / Fort Worth real estate market. It looks like the Fed had good timing in turning dovish. It should be noted that the Dallas / Fort Worth economy is much more resilient to declines in energy prices than other cities in Texas such as Houston.

I am beginning to feel the difference in investment efficiency between Wall Street and Main Street. I have talked to quite a few non-institutional investors and lenders recently. The lack of uniform procedures, the inconsistency in following the few procedures they do have, and pricing all over the map makes the primary market feel like the Wild West. Some lenders and note buyers will put together a portfolio of seller financing notes for Hedge Funds and will actually have more uniform practices. Although arbitrage opportunity would probably be the wrong term to describe the apparent pricing inefficiency in the non-institutional originated mortgage market, I would estimate there to be about 10% to 15% left on the table on a regular basis, all other things being equal. It is almost like seeing a regularly crossed market where the ask is 10 to 15% below the bid!

With my investment account this journal is based on, I am trying work a 2%, I hope, long term edge. A 2% edge is worthwhile due to efficent leverage. I believe 30% to 50% annual, scaleable account returns are a reasonable expectation with a true 2% edge, proper trade selection, leverage, and management.

I still need to do more due diligence and talk to a lot of people. However, if there truly is a 10 to 15% edge on main street, I may be able to leverage that into annual returns that are comparable to or even better than 30 to 50%. If my trading performance does not improve soon, my money will be reallocated to the easier investment environmemt on main street. Should Wall Street start crowding out the primary market, my focus would increase on transactional business.

My short gold and long platinum spread recovered from Tuesday’s selloff. My stop is now quite tight and I will not tolerate much adverse price action or negative action in correlated assets because of my increasing concerns over economic growth.

 

[maximumpossiblesuffering]

Closed my long gold short platinum spread for a loss of about $300 because of continued poor relative performance versus my expectations and the market.

My account is currently down 4.09% from inception. My broker, IB, has changed their performance reporting format such that my July, 2018 monthly performance is reported under August, 2018. In the last couple of months, where I increased my risk allowance and time devoted to trading, my performance declined when compared to the first few months of last year. I attribute my declining trading performance to fear of being wrong. It’s not so much the money. For example, I get into poker hands that represent several times my single trade risk allowance from time to time and generally am not feeling stressed when in that situation. When in a trade, I often time feel anxious and end up making emotional decisions. Being anxious is a great recipe to chase, only to get shaken out. Due to my substantial underperformance and increasing time and money requirement for my new Texas business, I will close this account this week. I will provide a sceenshot of my final portfolio performance report this week. I plan to look ar short trading strategies again in the future, but certainly not for the remainder of this year.

 

[maximumpossiblesuffering]

Gentlemen, start your strangles!

My trading plan will now incorporate longer term strangles, say 35 to 45 days on primarily ES. I will look to short 15 delta puts and calls. Because of skew, my short put side will be further away from the underlying price when I initiate this strangle than on the call side. I also plan to start a ladder of this trade by entering additional positions each week. My estimated positive expectation on this trade is from my perceived “inflated” IV on the put side less possibly understated IV on the call side as well as my perceived market outlook. Position management will be determined by gamma to further profit potential of the position or if a side gets seriously tested. At 15 delta each side, it seems the implied odds are significantly higher than the implied 30% odds of a single side over the life of the position.

Although underlying fundamentals and pricing for equities are not exciting, an accommodative Fed and apparent “extra flexability” on the US side in trade negotiations with China seems to imply some stability with a bullish bias in equities prices.

My main worry on this type of trade is my short put side being tested because of likely higher implied volatility increasing my short option prices. To counter this, I may use a out of the money ES calendar spread, say long four weeks out and short two weeks out, as a partial hedge. It is fully plausable that both trades can be simultaneously profitable.

Equities, with their typically higher implied volatilities, present additional opportunities that I will explore in future journal entries.

 

[maximumpossiblesuffering]

I am planning to initiate a bearish option position in AAPL on ideas their earnings report may disappoint. My perception is AAPL is steadily falling behind in new product development and is having quality control issues. Not good for a company that markets their products as “premium”. However, store traffic has been suprisingly strong as shown when I visted a local store in the Dallas, TX area several times to get my Apple products worked on. In addition, Apple’s increasing efforts at selling services may help their bottom line at some point. Furthermore, it appears early earnings reports of other tech companies are generally showing suprising strength. In addition, AAPL’s relative strength has been increasing.

All in all, this trade idea is not high confidence so I will adjust by putting on small position size. My expectations are for a ten point drop to about 195 after their earnings release.

Attached below is a chart showing AAPL volatility curves for nearby expirations:

I believe one can obtain a long term edge by buying cheap volatility and selling relatively more expensive volatility. For example, most nearby expiration series have higher implied volatility than further out expirations; The near money strikes have lower implied volatility than deeper out of the money strikes.

My trading plan for AAPL needs to account for their earnings report being due on April 30 and the typical volaility crush that follows earnings reports.

I plan to either trade a vertical bear spread in puts by buying AAPL May 03, 2019 $200.00 puts, selling AAPL May 03 $195.00 puts for a debit of $1.00 if offered or maybe creating a mild ratio spread such as buying 3 and selling 4 of the above strikes, effectively cutting my overal theta cost to near 0.

Attached below is option pricing shown in volatility:

Edit: Attached below is the trade profile with break even points. Note the indicated “Profit Probability” of 22%. This is acceptable to me because of the polarizing earnings event. Being a little off or a lot off on my perception will not make much of a difference in the amount of my loss. However, if I use my mild ratio idea, and AAPL gets crushed, I could end up being right on direction but end up having a losing trade.



Note the above data is from an IB account that has funding pending.

 

[maximumpossiblesuffering]

I am planning to initiate a bearish option position in AAPL on ideas their earnings report may disappoint. My perception is AAPL is steadily falling behind in new product development and is having quality control issues. Not good for a company that markets their products as “premium”. However, store traffic has been suprisingly strong as shown when I visted a local store in the Dallas, TX area several times to get my Apple products worked on. In addition, Apple’s increasing efforts at selling services may help their bottom line at some point. Furthermore, it appears early earnings reports of other tech companies are generally showing suprising strength. In addition, AAPL’s relative strength has been increasing.

All in all, this trade idea is not high confidence so I will adjust by putting on small position size. My expectations are for a ten point drop to about 195 after their earnings release.

Attached below is a chart showing AAPL volatility curves for nearby expirations:

View attachment 201388

I believe one can obtain a long term edge by buying cheap volatility and selling relatively more expensive volatility. For example, most nearby expiration series have higher implied volatility than further out expirations; The near money strikes have lower implied volatility than deeper out of the money strikes.

My trading plan for AAPL needs to account for their earnings report being due on April 30 and the typical volaility crush that follows earnings reports.

I plan to either trade a vertical bear spread in puts by buying AAPL May 03, 2019 $200.00 puts, selling AAPL May 03 $195.00 puts for a debit of $1.00 if offered or maybe creating a mild ratio spread such as buying 3 and selling 4 of the above strikes, effectively cutting my overal theta cost to near 0.

Attached below is option pricing shown in volatility:

View attachment 201391

Edit: Attached below is the trade profile with break even points. Note the indicated “Profit Probability” of 22%. This is acceptable to me because of the polarizing earnings event. Being a little off or a lot off on my perception will not make much of a difference in the amount of my loss. However, if I use my mild ratio idea, and AAPL gets crushed, I could end up being right on direction but end up having a losing trade.



Note the above data is from an IB account that has funding pending.

Was not able to attach screenshot in above post. Attached below:

 

[destriero]

You're paying 38-vol for May 200s. The Apr 200s are trading 23-vol. Your relative value trade (buying the 195/200 bear spread) is an edge loss of 100bp as there is skew. May will trade to 25 vol on the release so you lose on vol. There is no edge on vol here.

You should stay in your wheelhouse... wherever that may be.

 

[maximumpossiblesuffering]

destriero

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You're paying 38-vol for May 200s. The Apr 200s are trading 23-vol. Your relative value trade (buying the 195/200 bear spread) is an edge loss of 100bp as there is skew. May will trade to 25 vol on the release so you lose on vol. There is no edge on vol here.

You should stay in your wheelhouse... wherever that may be.

This is a post earnings play. Apple’s earnings are scheduled for April 30 after hours. The May 3rd expiration will be the front month after earnings Apple’s earnings report.

Blocking someone, then unblocking them to comment on their journal, reading it half-assed and then posting a irrelevant comments before blocking again is not considered high class by most.

Buy hey, I log out to read your entertaining comments. So there we have it.

 

[destriero]

I am telling you were vol will print after the report.

I know that MAY3 is the front week for the report.

I did not unblock you. I logged out and read your drivel. There is no vol edge. No relative value. You're buying at the 38 vol-line. You're ham-fisting an attempt at √time neutrality but you're still going to lose on vol.

 

[maximumpossiblesuffering]

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I am telling you were vol will print after the report.

I know that MAY3 is the front week for the report.

I did not unblock you. I logged out and read your drivel. There is no vol edge. No relative value. You're buying at the 38 vol-line. You're ham-fisting at attempt at √time neutrality but you're still going to lose on vol.

Ok, Thanks.

 

[maximumpossiblesuffering]

Destriero’s recent posts to this journal has stimulated my thinking. This has lead to some questions I intend to explore.

Is it reasonable for the thinking to be different on a binary event on some outlooks and goals that may conflict with optimal positioning according to current statistics or even expected post-event expected implied volatility levels? For example, implied volatility curves seem like they are the market’s assessment of all the various outcomes, but my scenario places most or all the weight on a specific outcome.

When I have a specific outlook that attempts to quantify an event to a specific price range that is significantly away from the current market and to maximize my payoff or leverage according to that outlook, is not the “most efficient” trade the one that accounts for all the aspects of my trade idea?

In the above situation, buying lower IV options that have expirations further out, leave me paying more net premium and having less gamma. For a trade that is likely to only last a day or two, a risk management plan that assumes a full loss of debit on a failed trade idea, and an expectation of a significant move in the underlying, it seems the further out and lower IV options are actually more costly as I will lose most of the extrinsic value on my long options on any significant move in either direction anyway. The decline in extrinsic value due to post earnings volatility collapse will not likely to be that significant as my soon to expire long option would be deep in the money and my short options would be near the money, if my trade goes according to plan.

I will compare the results of several hythothical trade types, including bullish option positions for this case study. I will post these hypothetical positions by Friday of next week and post the results on the following close on Monday after AAPL’s earnings report. Note: If there is a greater than 5 point gap on apple, I will record the trades results on the open. If the Monday gap is 5 points or less, I will record the results of these hypothetical trade results as of Monday’s close.