Riding the Inflection Point

[maximumpossiblesuffering]

Spent a good part of my weekend going over my trading plan. I believe I now have my time frame issues worked out and have better clarity on what I consider to be a trend or profitable trading opportunity.

My definition of a long term trend shall be based on weekly bar charts. My medium term trend will be based on daily bar charts. My short term intraday trend shall be based on the open of each session of the current trading day and the 30 minute chart.

My overnight trading plan will be to trade in the direction of the weekly trend, entering on a daily countertrend or narrow range bar, and exiting on a wide range bar. I will use defined risk strategies with options such as vertical spreads, butterfly spreads, calendar spreads, and long options depending on the trade’s volatility outlook. Money management will be based on trend reversal. On overnight gaps against my position that penetrate support, I will wait to see how that trading day develops versus the open. Indeed, I may actually add to my position using a very tight time based on a threshold amount from the day’s open.

My intraday trading plan will focus on either trend following or reversion to mean depending on time of day and other factors. I will also look to sell partially hedged options that expire on the current trading day. Ten points of ES premium or so that goes bye bye by the end of the trading day is quite the prize. Gamma exposure is a big risk here and tight money management will be applied on this trade type even though it will be partially hedged, just like any other trade.

Now that I have taken the red rubber ball out of my mouth...

Let’s see what I can really do.

 

[maximumpossiblesuffering]

Correction: No naked options, even intraday and partially hedged. Instead, will create a defined risk options spread.

 

[maximumpossiblesuffering]

Bought a ES option calendar spread: Sold ES May 22, 2019 2800 Put, bought May 24, 2019 put at a debit of 5.25. As I write this, ES rallied 10 points and the mid on this spread is 4.55. My objective is a test of 2800 on ES this week. If ES does not look like it will close below its open today, I will close this trade by today’s close.

 

[maximumpossiblesuffering]

Here some account statistics for the 1st week of this account:

Scalping: Trades, 9. Win%, 66. PL ratio, 1.31. Net Profit, $15.30.
Position: Trades, 8. Win%, 0. PL ratio, NM. Net Profit, -571.84

Overall profit, -556.54 or -1.8% of starting account value.

For scalping, I used mostly e-micro products. For position trades, I mostly used futures options.

Rough start in the first week trading this new account. Although I was profitable with my scalping, generally profiting from reversion to mean and trend continuation trades, there is clear room for improvement as shown by my metrics. I am confident my scalping decisions will be more “Crisp” going forward. The next step is to increase my scalping frequency. I generally expect to see 3-5 trend or range opportunities and 1 or 2 reversion to mean trades per non-correlated instrument per trading session. If I am profitable with my increased trading frequency, I will increase my trading size.

For my position trading, I am overtrading and applying a scalper’s mentality. Therefore, after suspending my trading in this area for the rest of this week, I shall limit my position trade ideas to three per week starting next week. I will use this weekend to better define my position trading philosophy.

Many commodity based futures contracts and economically sensitive stock prices are seeing pretty dramatic price declines. In addition, flight to safety vehicles such as JPY and ZB are seeing price rises. A global economic slowdown or worse is being priced in. This may lead to a broad and significant decline in equities prices. I only say “may” because the Fed with their easy money policy has great influence on certain aspects of the market.

If the Fed’s easy monetary policy is not enough, perhaps because economic and or geopolitical issues snowball, we may well take out the December, 2018 lows on the broad US equity indexes.

 

[destriero]

Upon a forensic-accounting of your trading... my recommendation is that you stop trading futures options. Now.

 

[Jasondupont]

Great information.

 

[Jasondupont]

Inflection points introduction. Inflection points are points where the function changes concavity, i.e. from being "concave up" to being "concave down" or vice versa. They can be found by considering where the second derivative changes signs.

 

[maximumpossiblesuffering]

Great information.

Thanks for the kind words.

Inflection points introduction. Inflection points are points where the function changes concavity, i.e. from being "concave up" to being "concave down" or vice versa. They can be found by considering where the second derivative changes signs.

Again, by inflection point, I mean either an acceleration of option premium time decay such as 2 weeks and again at two days or a significant event that defines a potential trading opportunity for a while.

I have spent a good portion of this weekend going over my trading plan for options. I feel the need to adjust from a purely directional mindset to a more statistically based mindset in order to improve my option trading performance. Therefore, I will place great emphasis on absolute and relative volatility in my trade selection decisions.

As It turns out, IB has a decent screening application which will save me a massive amount of time in looking for strong option plays. An example of IB’s screen application output is shown below:

Interestingly, there are fairly significant differences in volatility between stocks in the same industry. The reasons for these differences are worth investigating and after I gain more option trading experience, I may look into “Volatility Arbitrage”.

As it stands now, I plan to match appropriate trade selection according volatility and term structure. In future posts, I will provide specific inputs to my trade ideas.

Edit: Actually, hopefully every trading decision I make has solid statistical justification. This includes attempting to quantify intangibles.

 

[maximumpossiblesuffering]

Been looking for option trading opportunities by studying 52 week IV percentiles of various instruments. GC, SI, AUD, and CAD have very low 52 week IV percentile ranks while ZB and grains have very high ranks. Of note, JPY’s rank is near the bottom quartile while typically correlated US Government Bonds are near 100%.

My concern in going long Vega is I may be waiting a long time for volatility to come back into that particular instrument. Although I can reduce my theta cost by buying long dated options, a calendar spread that is a least theta neutral may be better. Another issue I have to consider is term structure where IV’s are higher in back months as shown by the historical IV for various expirations on SI below:

Edit: Chart referenced above to be placed in another post.

Attached below is a screenshot showing volatility levels and % ranks for various futures contracts.

Specific trading ideas will be posted later tonight.

 

[maximumpossiblesuffering]

After being down almost 4% since inception, my account is almost back to breakeven on positive precious metals trades.

I am now feeling more comfortable with my options strategy and have worked out a decision matrix based on implied and absolute volatility, volatility and directional expectations, and term structure and skew considerations.

I will post my option strategy matrix with delta based strike selections and durations this weekend.

Even though a US holiday weekend is coming up, equities markets will probably be in a wild ride as news comes out of the G20 meeting this weekend on trade and geopolitics. It would remove uncertainty if real progress was made in trade negotiations, but political gamesmanship will probably remain top priority. Meanwhile, most economic and sentiment numbers around the world are deteriorating. Even a immediate trade deal with US and China will likely not prevent tough quarter over quarter economic performance comparisons going forward. Maybe continued easing of Central Bank policies around the world can help keep things propped up, but the cost of this is reduced confidence in Government based monetary systems. We have seen gold and Bitcoin rally substantially as both US Government bonds and equities have rallied together.

I am now long a GC calendar spread by selling a July 5, 2019 1450 call, buying a July 12, 2019 1450 call at a debit of $2.80 on expectations of a test of multi year highs next week as continuation of a relatively recently established trend. A inverted term structure was another positive consideration for this trade, as it kept my debit relative to the front option price, cheap.

I have a calendar spread that is delta hedged(!) in ES. No CD-like volatility for me! I’m expecting range expansion next week in ES, but am unsure of which direction the initial move will be. In addition, IV still seems low to me. I bought 2 ES calendar spreads: Short 2 July 5, 2019 / Long 2 July 12, 2019 2860 puts at a average debit of 5.875. I chose 2860 strikes because they were at the implied 1 standard deviation level for the July 5th expiration and provided some positive theta. I bought a MESU2019 at 2937.50 for my delta hedge. This trade should be profitable on any ES large move in either direction. At the time I placed the calendar spread, it had positive theta.