Riding the Inflection Point

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Closed the M6EU19 partial hedge. It ended up covering the decline in my Eur calendar spread.

I now have calendar spread positions in ZB(ATM in both puts and call), EUR, AUD, and JPY(ATM in both puts and calls) because of favorable term structure and my expectation for increasing volatility next week in these instruments. I expect to be assigned a position in bonds and yen, but I’ll be hedged. What I’m looking for with these at the money put and call calendar spreads, when the front months expire, is to end up with a cheap straddle for next week. This is one of the beauties of inverted term structure opportunities.

I expect ES will hit ATH shortly after the Fed announcement. However, the Fed’s looking forward statement may not be as exciting for the market as the almost certain rate cut. I would be surprised if the market closed near its highs today.

Depending on term structure in ES, I may buy calendar spreads with the front month expiring Friday and also for the front month expiring next week.

 

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Looks like I missed on my currencies ideas. I figured the Federal Reserve lowering interest rates and the history of once the Fed starts lowering interest rates, there always have been additional rate reductions. I thought, even though the Fed rate reduction was well anticipated, this represented a change in the status quo. At this point, I’ll assume many Central Banks around the world will provide additional easing than what already they have already done.

The US has been and will likely remain the best investment game in town.

I was able to mitigate some damage by partial hedging, theta decay, and a profitable trade in a ES calendar spread. What other nut day trades calendar spreads? At least it gained 30%. I may reduce my currency option spread exposure a bit, but a negative US labor report or if Trump makes the mistake in firing Powell would likely help my positions.

 

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Favorable Yen move with increased volatility has benefitted my calendar spreads and helped by equity to hit an all time high for this account.

Bonds up .86% and ES is up .85%, yet gold is down .8%. You stupid markets! When bonds and stocks both appreciate, I see this a evidence the Fed is being very loose. With Gold 52 week IVP down to 46%, I feel better putting on a short term calendar spread for a test of recent highs. The cost of carry for gold is going down with lower interest rates and Central bank further easing around the world. Gold should attract increased investment demand from those concerned about monetary and fiscal discipline. Sold 2 Aug 9, 2019 Gold 1450 Calls, bought 2 Aug 16, 2019 Gold 1450 calls at a debt of 2.10. Position will be managed if gold nears or touches 1450 or within 3 days of expiration. Maximum allowable unhedged delta will be .3.

Edit: Exited my US Treasury Bond option calendar spreads @ 15/64 earlier for plus 4 ticks.

 

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Exited the Gold option calendar spreads at 3.00 for a gain of 42%. Although Trump’s Trade Tweet helped on this trade, it hurt my bullish NG directional butterfly spreads.

Volatility increased substantially and broadly, affecting multiple markets including Equities, each sector, gold, and currencies. It seems to me there are increasing chances of a negative economic feedback loop developing. Between the global economy slowing down, high debt loads of Government in its various levels, businesses, and consumers, and adversarial behavior of world leaders, we may end up in a Turing machine, where our moves and fate becomes inevitable. It looks like it will take both leaders to seemingly act out of character and put themselves in the others shoes. The US is right to demand enforceable rules over intellectual property. China is right to assert their national sovereignty according to history and their geography. It is inevitable China will be a global power and US moves to stall this only seems to make more enemies for us and accelerates China’s ascension. In my humble estimation, there should be plenty of room on both sides to negotiate a fair and enforceable trade agreement. The path we are currently on just means global pain, not resolution to our issues.

Also bought a ES Calendar spread even with the significantly higher volatility because of a favorable term structure: Sold 1 ES Aug 09, 2019 2875 put, bought 1 ES Aug 16, 2019 2875 put at a debit of 6.50. If all other things remain equal for a week, the indicated value of this spread would be 11.50. I chased this execution a couple of ticks. Shame shame.

Bought 1 MES @ 2958.25, sold at 2960.25 late in the day for a scalp because NQ was outperforming ES, basis the opening, much less beta considerations. This took some confidence by traders, I figured. I missed the quick run up to 2964.00 or so. However, the lack of solid underlying bids caused me to conclude the late day price action was just consolidation.

I expect to trade less calendar spreads in the future should volatility continue to rise, as it is looking.

Edit: Exited my multiple Yen Option calendar spreads for a nice profit.

 

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I closed the ES calendar spread for a 1 tick gain because it was not being as responsive to declines in ES as expected. This probably the result of term structure continuing to invert and a longer time to expiration of the front month than my other calendar spread trades.

I’m trying to gain the sense of the effect of heavy hedging has on future stock prices. I would imagine heavy hedging would tend to dampen moves.

One common denominator of highly respected traders is their commitment to physical fitness, regardless of age. From Paul Tudor Jones to respected traders on ET. Personally, I believe cardio fitness leads to higher effective IQ: Delta VO2 max = delta effective IQ. I recently have started going back to the gym and already feel increased energy levels.

A couple of traders I respect have shown a keen interest in another trader’s journal for some proof of his trades. With this in mind, this weekend I will post my trades with execution times along with my equity curve and performance metric of this account since inception. I will also do a performance analysis.

I will now look to use a compatible multiple strategy approach for my trading ideas. I missed out on an exceptional amount of low risk profits in each of the last two days. I was expecting range expansion in the currencies while their 52 week IVP was at very low levels. Although I had strong directional confidence in the Yen (Although it initially moved against me by a large amount), my directional confidence in AUD and EUR was not as high. For all these currency trades, I should have either bought a straddle or a delta neutral long option strategy with hedging in the underlying. The target option expiration date would have been August 2 for maximum gamma exposure. The theta cost is extremely high for such a position, but my likely holding period is only a few hours. Additionally, scaling out to cover multiple time frame signals seems particularly effective with this strategy. As it was, I was wrong in direction on AUD and EUR and am likely to take a loss on both positions. In my Yen trades, I made money, but only a pittance to what I could have made by using multiple strategies. At one point, I had about 10 positions open, but only used about 10% of account equity. I did have to leave some equity available for possible assignments in my soon to be expiring (at the time) short options in ZB and JPY, however.

Unless we get some good news over the weekend, we may be looking at a “Manic Monday” in Global equities markets.

 

[Overnight]

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Unless we get some good news over the weekend, we may be looking at a “Manic Monday” in Global equities markets.

Indeed. This is something that has been concerning me. I am starting to envision both May this year and Q4 last year merging, and creating another BAD few months.

I don't WANT it to happen, but it CAN happen. One Man. Ug!

 

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Attached below is a list of trades since inception for the account associated with this journal. I had issues with printing IB’s portfolio report, which is important for account number redaction purposes. Looking at the list of trades, it shows I made some money, about 1.8% of account equity in a little over three months. On directional futures trades, my performance metrics appear solid with a 76.4% win rate and a 4.3:1 P/L ratio. In my last journal, I was also profitable in directional futures trades. Appearances can be deceiving, however. I allowed a “conviction” trade go against me a 7 stop equivalent and this ended being my most profitable trade. Had I stuck to my trading plan, it would have been a $100 to $300 loss. “Conviction” trades are always impeached if money management levels are hit. No exceptions. If I ever have a money management problem again, I will put all my investment money in QQQ and write calls on it for the rest of my life. My second largest Futures profit was originally a gamma scalp where I decided to instead play the other side of the market. I ended up losing a small amount of money on the trade overall because the option side expired worthless. Considering these adjustments, it is evident I still have a negative expectation in trading.

Although my options trading performance was poor as shown by my net losses, I’m making progress. I made a fair number of calls that went immediately in my favor on some calendar spread trades. Term structure inverted, negating potential gains from vega and I did not get the benefit of significant theta decay. Even my .05 delta diminished as the position neared the money. I’m talking about one of my gold calendars and my silver calendar. At least with silver, I bought a mini contract to be assured of minimal delta exposure.

I completed my trade checklist, but there are some pending refinements before I post it.

Sorry for the hands, just noticed them. I’m in a hurry right now, but will post better versions if requested.

 

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New equity high at $32.4k on Eur strength. This was originally an options calendar spread, but the front month expired on Friday. I closed my entire 5 call position because if risk aversion goes high enough, money will flow towards the safest haven currency, the US dollar.

I did not have a short position in ES because of my EUR position. I feel underexposed to the short side of equities now, however.

Looking at US Government Bonds, the Fed seems to have the easy money pedal mashed to the floorboards. Bonds have been hitting weekly highs for quite some time now, along with US equities, until the recent sell off in equities, of course. My guess is future price action in equities will be a battle between Fed easy money and weakening fundamentals. Easy money is another fuel source for the market; but weakening economic fundamentals could lead to job losses and in turn, consumers selling their investments from their non retirement accounts to even retirement accounts like in 2008 if things get bad enough. There is also the potential issue of Demographics negatively affecting the market with retiring Baby Boomers becoming net sellers of stock at some point.

I will now rely technical and sentiment indicators only for my trading decisions. I see the recent market high not being challenged again this year and expect a generally declining market with wide ranges due to fierce short covering rallies. I will only execute defined risk trades from now on and will avoid being over exposed in correlated assets.

 

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A slightly positive day overall. A long synthetic straddle in ZB lost $72 even though the trade experienced better than a 3/4 point move in the few hours before I closed it. Although ZB IVP was at 52 week highs, I felt with the equities markets being down 1.3% last night we were at a decisive point. If there was a panic, Bonds would have likely gone ballistic. As it was, correlated assets to equities seemed supportive and Bonds could then to be vulnerable to a correction given it’s extended move lately should equities rally. Although I had checked the volatility curve earlier and it looked like a nice, friendly “U”, in my haste, I missed that my at the money options were a bit on the right side of the “U”, and thus exposing my trade to vega losses. Sloppy of me and this is where either being more focused or a multiple monitor setup would have probably helped.

Made money in a partially hedged Australian call buy that offset my ZB loss. The 52 week IVP was at about 35%.

Today I bought a .13 delta risk reversal in ES for a credit of 2.25 in order to take advantage of a skew opportunity. The overall delta of this position was .27 which I hedged by selling 3 MES. If I am seeing things correctly not only am I positive theta, but I am positive gamma as well, at least to a point on this trade. This trade has upside potential should ES rally significantly. However, I have vega and possible skew risk should ES decline significantly, but at least the risk reversal expires this week. I will maintain a modest negative delta on this trade through hedging adjustments below a certain price point.

I bought a long term Gold bull spread because bonds rallied yet again in spite of the equity markets recovering a substantial portion of their previous day’s losses today. As I’ve said before, the Fed is in full provide liquidity mode and they are not alone. Quite a few Central Banks around the world is engaging in stimulus actions. More liquidity equals asset inflation, including gold. I hedged my net positive delta by selling MGC. This position is positive gamma and vega. I will maintain a slight positive delta on this trade.

 

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Realized profits today of +.65% on a EUR calendar spread and the previously mentioned hedged gold vertical spread where I profited on Vega and delta expansion. Most of my trades lately have seen very little adverse price action before moving substantially in my favor. An appropriate adjustment would be to allow more delta exposure.

I also had a long synthetic EUR straddle as my directional confidence was low, but I had high confidence in range expansion because day of week statistics and expanded ranges in positively and negative correlated markets to EUR. In addition, 52 week IVP was only about 30%, substantially less than many futures markets right now. I was disappointed by todays EUR movement and was tempted to call the ECB to see if EUR had a DNR request on file. I exited this trade at about breakeven. I may try this trade again tonight as there have been two narrow range days after a run up. These narrow range days may be consolidation and thus gives me some directional confidence to the upside. If I do this trade, I will either structure a synthetic straddle to have some positive delta and will use the August 9th options expiration. I will use a time stop of about 11:00 am ET tomorrow.

Had a real life example why one needs to be able to price options on the fly either by put-call parity or by having a option pricing model. There was no market shown for an slightly in the money option on EUR in TWS. All the other options had bid/asks on my screen, both deep in the money and out of the money, except the one I had a position in. I ended up calling IB for a quote. In response to this event, I will have a spreadsheet open with a options pricing model, but a put/call parity calculation is quicker because it can be done in one’s head and probably is good enough, especially for near the money options.

I hit 30% buying power utilization this week and am confident I can safely go to 50%.