High Probability Options Trading Journal

[guru]

High Probability Options Trading Journal

Just moving this strategy out of my previous & more generic journal at https://www.elitetrader.com/et/threads/gurus-pursuit-of-the-holy-grail.349297/page-13#post-5462838 , and after setting up a new portfolio-margin trading account at TDA a month ago just for this purpose: trading highest probability options strategies and tracking/posting weekly P&L here.
I won't be revealing strategy details unless/maybe when everyone else starts posting details of their own successful strategies.
Though generally I'm trading various temporary option skews that open up as the supply & demand shifts between different parts of the options chain.
All of my trades are hedged, at least partially, though they do have pockets of very large risk. Some of my trades may be considered free hedges, thus profiting from the market pullbacks, though there is a large risk in miscalculating something.
I am also making small bullish bets including holding small number of shares.

Most of my trades have multiple legs and averaging 4-7 options (not legs) per trade, therefore my commissions will also be high, up to $4.50 per trade, at least until I negotiate lower commissions with TDA.
I may be in a trade from a day to several months, though usually aiming at 1-2 weeks on average.

The goal is to make minimum 10%/year ($100/day on $200K account) with max drawdown of about 2%, thus basically keeping the account steadily growing. Unless more opportunities present themselves, and they often do.
Currently this account is up approx 7% since starting trading a month ago, so over 80%/year is possible, or much more if I'd made larger bets. For now I'm trying to play it safe while working towards improving my approach. On another hand, I'm trading in this account part-time, so not sure how far I will be pushing it without spending more time on this.
Most of my trades come from my internal options analysis system that suggests highest probability trades, statistically and/or historically, which I then review and manually plug into ToS. Though some of my trades come from Excel spreadsheet where I track past performance of selected strategies.

And unfortunately for now the profit and then the drawdown sometimes shows as swinging a lot due to some illiquid LEAP options that TDA is unable to price, and simply pricing them at the mid. My account is usually quite stable during the day, only occasionally showing large swings due to market makers widening their bids. But the swings are showing up much larger after market closes when some bids may be completely withdrawn and TDA may be pricing a $30 option at $10, or a $10 option at $30. This throws my small drawdown goal out of whack, so I may try to stabilize it by holding less LEAP and illiquid options.
I may also need to account for the account balance being off by +/- 1% (+/-$2K) at any time.

Again, the goal of this journal is simple: post weekly account balance / P&L.

(NOTE: this account was sitting empty until recently, and I started trading after getting approved for portfolio margin on September 13)

 

[morganpbrown]

Is this sort of your alternative to holding a bunch of cash? Or are you keeping the cash stash in a different account?

 

[guru]

Is this sort of your alternative to holding a bunch of cash? Or are you keeping the cash stash in a different account?

I have my main account at Interactive Brokers but they require too much margin for some strategies, or actually my margin swings unpredictably when various options expire. I also hold various long-term conviction trades in there, so it can swing much more.
This one is meant to be more stable, so indeed I'm thinking of it as an alternative to keeping money at a bank and getting practically no interest, just trying to get steady growth instead. But there are always risks of things going wrong, especially when trying to take on more trading opportunities, so not everyone may compare this to holding cash.

 

[guru]

Just a quick weekly update, though not much has happened recently. I'm making some profitable trades but the account is fluctuating due to trading illiquid options, and when those expire then I'm taking on new ones that also cause fluctuations. I've got out of most LEAPs but even shorter term I may, for example, buy/sell some $0.50 combos that can be valued by TDA anywhere from $0 to $3, depending on bid/ask spreads. This way my balance is usually off (mostly after hours), but on average the account shows steady growth.

 

[guru]

I'm not trading too much in this account and the balance grows slowly, therefore I'm not updating this journal too often. Here is just the current P&L:

3 months:

1 month:

The current/today's balance of $234K is wrong due to TDA unable to estimate OTM option prices with wide bid/asks after hours, but the daily P&L graph shows better approximation and the liquid account value above $220K. So it reached the 10% goal in less than 3 months, with no sizable drawdowns. I'll continue "growing" it when time allows and opportunities present.
I still have a lot of positions that will expire in a month or two.

 

[morganpbrown]

wow, this beats the hell out of a money market account!

 

[guru]

Just a quick update. I'm fine-tuning my approach, mainly to find more opportunities while lowering the risk. I'm now up over 20% since starting 3 months ago, and the account balance/P&L is reasonably stable over last couple days, meaning that it seems fairly accurate at around $245K.
I've had couple busy days when opportunities showed up and I've traded a few hundred contracts, while on other days I don't trade at all, just waiting for some options to gain value, or theta, or expire - up to 3 months out.

 

[guru]

BTW, here is a list of undelyings for the options I currently hold, so you can see how it all adds up in small amounts. Losses are also shown, though some are false due to wide bid/ask spreads that result in an invalid mid-price, while others may be temporary and can turn to profit over time. Of course some losses can persist or grow, but that's where diversification helps.
Most profit comes from overpriced (high-iv) options on heavily hedged stocks (like BABA due to it crashing recently, AVGO prior to yesterday's earnings, others due to hedge funds buying shares and likely needing or being required to hedge, etc).

 

[morganpbrown]

BTW, here is a list of undelyings for the options I currently hold, so you can see how it all adds up in small amounts. Losses are also shown, though some are false due to wide bid/ask spreads that result in an invalid mid-price, while others may be temporary and can turn to profit over time. Of course some losses can persist or grow, but that's where diversification helps.
Most profit comes from overpriced (high-iv) options on heavily hedged stocks (like BABA due to it crashing recently, AVGO prior to yesterday's earnings, others due to hedge funds buying shares and likely needing or being required to hedge, etc).

View attachment 273020

Thanks for adding some color to your method. And huge congratulations - it's cool to see someone who knows what they're doing, having success.

Are the hedgers the "dumb money" here? e.g., they buy puts at any price. Do you have some special method for determining where the dumb money is? Just high volume and big moves?

I did have some success selling OTM calls on robinhood stock in the first couple weeks after options were listed. It was obvious that the meme boyz were buying at any cost.

 

[guru]

Thanks for adding some color to your method. And huge congratulations - it's cool to see someone who knows what they're doing, having success.

Are the hedgers the "dumb money" here? e.g., they buy puts at any price. Do you have some special method for determining where the dumb money is? Just high volume and big moves?

I did have some success selling OTM calls on robinhood stock in the first couple weeks after options were listed. It was obvious that the meme boyz were buying at any cost.

Well, not sure if they are dumb money because dumb money is usually associated with retail traders. I may often be dealing with "smart money" like institutional investors ( https://www.investopedia.com/terms/s/smart-money.asp ) , because they may be required to buy hedges due to regulatory requirements, for example. And they're the ones having capital to spend big on buying hedges, which sometimes shows in option IV, volume, and/or bidding up option prices. I have some discretionary methods of seeking those out, meaning that I may be able to distinguish high IV due to unknown risks/events/outcomes, from actual hedging activity. Though basic IV & IV rank might be sufficient. And initially I didn't think much about what specifically drives and shapes the IV, just looking for vol skews that I can act on. Later I noticed that I'm picking up options on stocks that often show strong buying or selling, with the direction being persistent (especially stocks going up continue going up and surviving market pullbacks), which gives me additional ideas on how to add direction to my trades. However, generally I'm trying to be non-directional, and trading some calls in addition to puts. In trading its easy to make wrong assumptions and become biased, especially in terms of reasoning why and how things work.