Riding the Inflection Point

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Account equity increased by .11% (unrealized) today mainly on a ATM wide butterfly spread in NG. NG has a reasonably high absolute IV for this time of year and is currently at 100% IVP. Later this year, I will be looking for a short calendar spread in NG underlying as I expect the Fall and Winter in the Northern Hemisphere to have higher than average heating days due to the current solar minimum we are experiencing.

Did some morning traveling and was busy throughout the day, so I only completed one trade today. I tried my EUR synthetic straddle idea this early morning by selling 1 EUR @ 1.1240 and buying 2 Aug 09, 2019 1.1250 calls @.0015. I ended up breaking even on this trade after covering EUR @ 1.1220 and closing the calls @ .0006. Related markets were not doing much, the US employment numbers were coming out, so I decided that it was best to close the trade out. As it turned out, those with quick reflexes could have done reasonably well by gamma scalping today.

I’m feeling a little dirty because I have a couple of confessions to make: I closed my hedged risk reversal trade yesterday because I was not able to constantly monitor the changes in my delta exposure. At the time, ES was down sharply and fluctuating widely. I’m such a pu**y. Had I held on to the trade even with a potential of a .10 delta exposure (Oh, the horror), I would be looking at an outsized gain right now given the big rally we had in ES since my exit. This is particularly pathetic for someone who held a 1.00 delta exposure in NQ for several days. There are more details to this crime against trading that I don’t want to share for fear of getting justifiably getting kicked off of EliteTrader! I also don’t want to admit to taking a 2 tick profit on a big gamma ZB put within 30 minutes of the high in Treasury Bonds on the same day. It is weird that I can comfortably make a $750 decision in a poker room, But I sweat over a couple of hundred in trading. Even weirder, I sweat even more over a $1.00 decision in a home poker game with friends! My conclusion is it is not mainly about the money with me. It is about my obsession with being right. I need to get over this and go out there get comfortable with making trading mistakes that are large enough to be painful. This will allow me to benefit when I am right with meaningful profits.

I like the potential of hedged risk reversal trades, especially when there is a significant skew involved and will be exploring them in detail over several scenarios this weekend. There seems to be potential for risk reversals to be effectively used in conjunction with other trading strategies as well.

 

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My account value gained .03% net Friday on closing my NG butterfly at a loss and a profit in ES that was reduced by a hedging error. The NG fly is no longer a preferred strategy and I wanted to free up capital to focus on my new preferred trading strategy. My account performance since inception, now at three months, is up 4.756% or 18.9% annually. This is roughly 3 times SPY’s performance over the same time period. My trading performance has improved recently due to better trade selection, better position management, and higher buying power utilization.

Looking forward, I believe my preferred trading strategy will allow me to produce consistent and significant returns. On a weekly basis, I expect to exceed .8% returns, or over 40% per year. This trading strategy is scaleable.

I have identified 17 different trading strategies that have perceived edges. I wish to develop a methodology that proves these trading strategies indeed have edges. There needs to be a foundational reason why a edge is allowed to exist in our competitive marketplace such as premium paid for transfer of risk or discovering a mispricing opportunity due to superior knowledge. With AI increasingly making inroads into trading, the last refuge for human traders will be in the realm of the intangible and context. By context, I mean the recognition and effective weighing of relevant information for a specific point in time. In future posts I will go over these 17 non unique trading strategies on hopes it will stimulate additional ideas and discussion.

 

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Account value down .01% on loses in 4 out of five scalps, including scalping into and out of my primary spread trade as well as having a suboptimal strategy in a declining market. So 1/6 correct decisions today and I still basically broke even. That’s something to feel good about. My initial assessment was to look for a short, but my various indicators were mixed. After the market traded at a threshold level that would have triggered a short strategy, It rallied to above the open. I decided to use a hedged positive gamma strategy that favors a strong market. My scalps were in response to various trading signals in an effort to maintain net beneficial delta, but most of my signals did not work today. My underlying position gamma was high enough to mitigate most of my losses. On a day like this, except where I have the right strategy on and scalp a little better, I would expect to make 1 to 2%.

It appears IB’s margin policy on ES risk reversals is to apply full ES Futures margin even at the .25 overall delta spread. As I adjusted my exposure with trades in MES, my overall margin requirement went down as hedged my deltas. I wonder what would have happened to my margin requirement if I overhedged?

Looking at US equities markets, there seems to be a battle between geopolitical and economic concerns versus a very accommodative Fed. Although I have no sense of what to expect in the next few weeks, I would imagine any potential market selloff will be muted to what it would have been if the Fed continued to raise rates and to pull liquidity, as was the plan a few quarters ago. Investors with uninvested capital will likely feel uneasy about committing to the various inflated intangible asset classes and some illiquid tangible asset classes. My guess is uninvested funds will increasingly find its way into US equities markets over time as the Fed continues its easy monetary policy and economic concerns wane. If the US labor market were to start weakening, I have no doubt the Fed would hit the monetary afterburners in an attempt to forestall a slowdown from gaining enough momentum for us to enter a recession.

 

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Account value down .02%, marked to market. Started the day with a lack of urgency and missed the big ES move. I actually had the thought of entering a delta hedged, 16 delta ES risk reversal at the open. This trade would have likely added 2 to 3 percent to my account value. Had a nice long side trade in PPLT for a $.70 gain on ideas the change in risk environment today would favor platinum. I bought PPLT on the way down, not bothering to wait for it to stabilize, taking about $.20 of heat. I would have held some PPLT overnight, but its relative performance to gold was not impressive at all, against my expectations. My open trade is my nemesis, long EUR synthetic straddle on a half-baked volatility correlation idea. I guess I’m the kind of trader who figures a dead horse is bound to move sometime. Normally, I close synthetic straddles in the same day I open them due to theta costs, but I was already whacked hard on theta, I had some negative delta on EUR’s weak US session close, and I wanted to see how the Europe session plays out. Win, lose, or draw, I am out of this trade on Wednesday. The associated options expire this Friday.

Been going over the atticus / destriero journals again and this time around, I am understanding these posts much better. There is a wealth of knowledge in these journals and anyone interested in options would benefit from reading through them. ET poster Corto put together a link of several good ET option threads:

https://www.elitetrader.com/et/threads/the-staggered-butterflies.329827/page-3

 

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Error correction from yesterday’s PPLT trade: Took $.46 of heat instead of stated $.20. Normally, I wait for the damn bar to close before trying to catch a falling knife. Had I done so, I probably would have improved my entry by $.15 to $.25.

Lost .46% today on MES scalp losses and under hedging long deltas from a ES risk reversal because of platform modeling deviations or ES volatility increases. I failed to exit this risk reversal after receiving a sell signal. Instead, I tried to manage this and another trade put on later by managing my deltas. Exited my EUR synthetic straddle at a loss of $115.00. At about an hour after the open, bought a Aug 19 ES 2740/2810/2880 put butterfly at 10.25. In retrospect, this fly should have been wider. This position is still open, with a partial delta hedge of .10 with a long MES @ 2848.00. My biggest mistake of the day was not taking on significant negative ES delta after my sell signal. I was more focused on reading and posting about trading rather than actually trading. Starting now, I will eliminate all possible distractions until the market closes.

 

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Gained about .4% today on a short ES straddle trade as I expected a range consolidation day. I made a small long ES put profit in the afternoon. I was able to get IB’s Portfolio Performance Report to come up and will post select pages tomorrow, including a daily trading performance report graph.

I’m conflicted in my outlook of the US stock market. On the weekly chart, we are in a downtrend. The global economy and some recent US reports, but not US consumer spending, are showing weakness. The 2 year / 10 year yield curve is inverted, signaling likely recessionary conditions in 6 months. There are signs of financial stress in Europe with the underperforming EUR and signs of Chinese stress. NQ has recently started to underperform ES which may be seasonal or a possible sign of asset allocation away from higher beta stocks, a sign of increasing risk avoidance. In addition, the character of the market seems to have changed from a slow, steady grind up to “One day wonders” on the upside featuring short covering without next day follow through. We are also near the psychologically significant 200 day moving average. However, VIX seems high relative to the recent modest decline in US equities. I imagine there is a lot of hedging going on. The substantial decline in long term US treasury yields should help stocks retain some attractiveness.

All things considered, I believe we are in a topping process in the US stock market but the ensuing Bear Market will not be as severe as in the past due to early Fed action. If the US market does not go through a bear phase because perhaps of a extremely accommodative Fed policy coming to the rescue, it seems reasonable to expect asset bubbles to form and attitudes towards risk by market participants and even consumers to eventually reach dangerously complacent levels. We need recessions and corrections to keep speculative excess in check in order to avoid incurring serious systemic risk. Record Government, corporate, and consumer debt levels when combined with no fear and asset bubbles leads to serious systemic risk. Oops, I said serious systemic risk twice. Oops...

I will be updating my trading plan this weekend in order to make it more logically consistent from a trading perspective. I will post live trades for the next two weeks starting Monday and will provide my decision rationale.

 

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Ended up losing .08% of account value on Friday after being up .22%. My first trade was a partially delta hedged .16 risk reversal in ES for a credit. I was conflicted whether to go for a day trade or to hold this trade until expiration next week. I ended up making it into a scalp on a idea to go flat over the weekend. However, by structuring this trade for a credit, this trade was less efficient given my outlook and the the large ES rally. I exited this trade early, as it turned out, when ES was was up 1 SD from it’s RTH open. As I was getting ready to shut down my trading platform and get ready for the weekend, when I noticed an apparent pricing discrepancy in flight to quality instrument, the Japanese Yen. So I go long volatility in Yen. In the late morning. On a Friday. In the Summertime. I will schedule my surgery on Monday to have a 1.5 kilo tumor removed from inside my head.

I will ramp up my trading of negative skew in ES, including hedged intraweek trades for premium collection when my market outlook is at least neutral to bullish. On days when I’m bullish on ES, I will enter intraday, partially hedged, risk reversals structured for a debit.

Attached below is my account performance since inception:

On the Daily Performance Report chart, the large drawdown and subsequent rise was a single NQ trade over several days. No more undefined risk trades for me overnight. I am raising my account performance expectations to 1% per week, based on ROC calculations of my primary strategy. My expectations are actually higher than this, but until my operation, I had better allow for random trades to be a drag on performance!

 

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Bought a ES directional bearish put calendar: Aug 21 2930/2880/2830 @ 9.00. Will scalp into and out of hedges until I close this trade, which will probably be on Tuesday or a close approach to the body. My preferred deltas on a directional calendar are 50/16/2.5, as in atm/1sd/2sd, but will adjust a little according to IV differences among the strikes. Put skew gives this trade an edge.

 

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Bought a ES directional bearish put calendar: Aug 21 2930/2880/2830 @ 9.00. Will scalp into and out of hedges until I close this trade, which will probably be on Tuesday or a close approach to the body. My preferred deltas on a directional calendar are 50/16/2.5, as in atm/1sd/2sd, but will adjust a little according to IV differences among the strikes. Put skew gives this trade an edge.

Closed this trade at $8.50 on ideas ES will test last week’s high which is about 20 points higher as I write this and theta being a negative here on this position that expires tomorrow. My MES hedges reduced by $50 loss on this trade a bit.

I bought a GC butterfly spread on continued monetary concerns: Aug 30 1510/1550/1590 @ 6.80. I will use a flexible hedging strategy on this trade. Took a profit on a overnight trade on MGC.

Monday’s account performance was about unchanged, but my current account value is currently at new all time highs.

I perceive that even though my option spread fills have been near mid price, I have been paying too much as indicated by subsequent quotes, especially outside RTH. I will now take the extra step to calculate fair values of my option spread orders and adjust my orders accordingly.

Edit: Damn, I should have waited for the ES RTH open and applied a opening price threshold as a decision point on whether to keep my bearish directional calendar. The mid on the fly I sold for 8.50 is now 15.50, not a bad return for an additional 11 minutes.

 

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Account value increased by .43% Tuesday on closed MGC as well as my open and partially hedged GC fly.

I am quite surprised on how my previously closed ES fly performed today. There was relatively little relative price movement in the fly during late yesterday’s selloff compared to today. IB’s pricing model, Trade Profile, did not indicate delta expansion to the degree seen today. I need my own option pricing model. No problem, a little math and statistics is a good thing for an options trader to have. Besides, there are some ideas I want to quantify.