Riding the Inflection Point

[maximumpossiblesuffering]

Bought a calendarized risk reversal in ES to take advantage of put skew and to potentially benefit from a rally in ES while maintaining a very hedgeable flat delta to the downside. I calendarized this risk reversal to gain positive theta and to save a couple of hundred basis points in call volatility. Short ES 8-23 2830 put, long ES 8-26 2930 call @ 5.25. Short 4 MES @ 2897.25 as my delta hedge.

Attached below is a screenshot of IB’s Trade Performance Profile, fingers crossed.

Will exit trade if ES drops about 1%, as deltas will no longer be linear. Trade target will be based on ES taking out last week’s high of about 2940.

Edit: As usual, I will scalp around my hedge as perceived high probability intraday opportunities arise.

 

[destriero]

You bought vol into the Fed minutes.

 

[destriero]

I would cover at +12 before the Minutes are released.

 

[maximumpossiblesuffering]

Closed the risk reversal trade and related hedge for about breakeven on concerns ES flatlines until the FED minutes are released with corresponding volatility crush afterwards. It would have been logically consistent with the way I set up this trade to maintain a net positive delta. As it was, vol declined about perfectly as delta ramped up as my long call approached moneyness and the short put, deep out of the money, became a non factor.

It may be better to structure this trade type for theta generation and to look for another strategy that is more responsive to moves to the upside in ES.

Maintaining my delta hedged GC fly. I am willing to risk volatility crush on this long convexity trade as I believe gold will have a big move in either direction this week and the following week.

Attached below is a promotional interview in 2016 or so of a hedge fund manager. He is a long vol trader who looks for outlier moves while attempting to minimize drawdowns in stable, low volatility environments. This fund manager believes there is huge tail risk on both sides of various markets.

The next video is another promotional interview from about 2012 of a billion dollar hedge fund risk manager that oversees the fund’s option strategies. It is interesting to hear his thought process on several trading related subjects.

It is informative to watch hedge fund managers compare their styles with the competition and vice versa. Each has success with their own methodology because they understand the context or conditions required for their particular strategy to work. This is best highlighted a video of a hedge fund manager who focuses on selling options. I will post this video when I find it again.

 

[maximumpossiblesuffering]

Account value for Wednesday increased by .2%, including unrealized profits in a new TLRY position where I bought a Aug 23 30/32 vertical call spread for $.75 near the open on a news story that TLRY was entering the European market. Although TLRY may ultimately lose money there due to competition and regulatory issues, it seemed to me this move lends credence to the idea TLRY is a real “player” in the marijuana space. I may exit this trade tomorrow as risk to reward is becoming unfavorable. I may look at this company in depth in order to determine if this company may have viable prospects and thus be a viable longer term play. IV for Friday expiration is over 80% with plenty of skew. TLRY’s last earnings report was 8-13-19.

Attached below is three out of many YouTube videos that feature free recorded Sanford and MIT classroom instruction on finance subjects or subjects that have application to finance:

Although these courses are basic for finance majors, I see this information being beneficial for someone of my background.

 

[maximumpossiblesuffering]

Account value down .07% for Thursday on my gold spread loss and markdown of my TLRY vertical spread. I made a point on a new ES fly. Unfortunately, ES moved too quickly for me to realize a decent profit. So I gained 1 point out of a 25 point move. I will trade more vertical spreads in the future to compensate for this. My TLRY exit was $.94. I was mostly hedged on my gold fly. I had to breakdown this trade into vertical spreads to exit it on the IB platform. I am now flat and done for day.

Attached below is a video that describes how to value option spreads so you don’t unknowingly pay too much. Basically if you are buying relatively expensive volatility and selling cheaper volatility due to skew or other factors, you are getting less bang for your buck.

Edit: I also note that after I exited the ES fly and ES rallied by 10 points, the fly gained an additional 3/4 of a point. I’m assuming this was because higher IV was momentarily inflating the body and when the selling pressure stopped, it allowed the fly to gain value even as ES moved significantly away from the body.

 

[maximumpossiblesuffering]

Account value unchanged for Friday due to no trades taken. Played poker late into the previous night and was not all there mentally in the AM. In addition, I was setting up my platform to accommodate day trading and scalping of multiple individual equities. Individual equities provide better isolation for trading ideas based on the various events, both scheduled and non scheduled that take place on a daily basis. Some of the key skills here are pricing the event and determining if the trade idea is crowded for a possible fade.

I am reviewing a University study on options trading. This study backtests selling strangles and buying calendar spreads and compares the performance of these strategies based on volatility levels. These strategies, depending on volatility levels, outperformed the SP 500 up to 20:1 over 15 years or so. Another benefit of this study is it shows the methodology behind it. This will help me with my own backtesting, as I have ideas to improve performance even further. I will post this study in a future post, but the study shows it is profitable to sell straddles as long as volatility remains below a certain threshold. Once a certain volatility threshold is reached, it is better to wait before entering new positions. Calendar spreads are most profitable during term structure inversions. No news there, but this study shows the average trade performance of calendars for a given volatility level.

US leadership seems to be taking our currency reserve status and the expectation of Federal Reserve easing for granted. This is a dangerous game that will inevitably backfire as the global economy continues to develop. England used to be a Global power and London was the top financial center of the world. This was not that long ago. US actions, such as sanctions, tariffs, and wars are making it less desirable to do business because of risk and preference. As alternative markets continue to develop and new relationships between countries are formed, the US will find itself increasingly isolated economically and geopolitically. In my mind, it is safe to say the US has reached the peak of its influence and is on the way down. I hate to see this because opportunities in business and investing in the US will decline as well. In my perception, several countries are realizing the benefits of creating a friendly environment for businesses, both large and small. Where there is opportunity, money will find it. The corollary to this is money will flow from lesser opportunities, just as England has experienced over the years.

 

[maximumpossiblesuffering]

I plan to trade the following strategies next week:

1. After market appears to stabilize, buy a Friday expiration ES risk reversal (Long call, short put) for net theta capture and use a flexible hedging strategy.

2. Intraday trading of individual stocks based on macro news. Laggards will be piled on while looking for a reversal relative to the leader. Leaders will be joined until their relative strength fades.

It seems likely there will be continued positive and negative developments on trade, Fed policy, and economic reports, thus making it difficult to apply other strategies. However, given increased daily ranges, intraday trading has particularly high profit potential right now and should be focused on.

I will post my end of month trading performance through August over next weekend or the following Monday.

 

[maximumpossiblesuffering]

Account value closed up 1.41% on a ZB bear spread and a ES partially hedged risk reversal. I entered the ZB bear spread on the close of a 5 minute wide range up bar. There was good news on Japan and US trade negotiations. The Nikkei was showing good relative strength and the US equities market decline seemed contained. The ZB bear spread was exited before the US durable goods report and after capturing 60% of the initial credit. I entered the ES risk reversal (Short Aug 30 2750 put / long Aug 30 2900 call at about .35 total delta) when ES was at 2823.00 and exited this trade when ES was at 2874.50. I had on a significant hedge in MES that substantially reduced my overall profits on this trade. However, the main purpose for this trade was theta capture, but got lucky on China and US news of trade war thawing. I currently have no open positions.

Was going to trade individual stocks today. Soon after the open, I did get a sell signal with a entry signal following a few minutes later. I did not take the entry signal(s) because the slow price action in my three target stocks were not consistent with what I expect for that time of day or with declining prices. Later in the day I did eventually get long some ES deltas through another profitable risk reversal trade.

From this point on, all of my trades will be defined risk at all times. After hearing about the Turkish Lira dropping 15% in minutes, I can only imagine the damage to one’s account. Even a resting stop may have resulted in severe slippage. As we have seen a lot recently, trend reversing news can pop out anytime. Although defined risk trades have higher costs, in many cases the return on capital is better than outright positions due to much lower margin requirements. My buying power utilization was about 25% today.

I am becoming more efficient at finding trade ideas, but I still feel like I’m looking for something in the Grand Canyon with a microscope due to my travel-light, single monitor trading setup.

 

[maximumpossiblesuffering]

Account value increased by .5% on profitable MES scalping around my partially hedged complex options position.

Other than biting a whipsaw near the close, I scalped very well and completed the most trades since starting this journal, if not an all time record for me. Last night I created a ES options position to take advantage of large skew and a inverted term structure by selling higher implied volatility and buying relatively lower implied volatility options. I sold 2 ES Aug 30 2840 puts, bought 2 Sept 6 2840 puts, bought 2 Sept 6 2920 calls, and sold 2 Sept 6 2960 calls for a net debit of 23.00. My overall delta was .24 which when I hedged, IB would lower my maintenance requirement to $796.00. The theta is currently 2.222 but this position has a positive vega exposure of 3.22 and a unhedged probability of profit of 81%. delta exposure is relatively flat over a wide price range. Potential theta capture versus my maintenance requirement is quite large. I would not mind either a ES close of 2840 or 2960 on Friday. Any close between these prices is ok as well. Of note, in entering this trade AH, i was able to split the 2 1/2 bid/offer spread for an instant fill by offering a 1 tick price improvement. During RTH, I saw the bid/offer spread on this 4 legged strategy stay in a 2 tick range! What a great time it is to be a retail trader.