Selling Premium from a Macro Trader's Perspective

So my daily update journal turned into a weekly and is now a "whenever I feel like it." It's a wonder how I got my college degree and served in the military. Lucky it was just the reserves LOL.

Not much has changed on the macro front. Valuation-wise, I think the previous highs will serve as the upper limit of this rally. We may surge past it temporarily, but my first inclination is to sell into the rally and buy back in at a higher price if I'm wrong about this. I'm much more comfortable taking that risk than risk buying too much now and get caught holding the bag.

If we keep rallying, I'll sell 100 shares at progressively higher prices while selling 1 ATM put/day. Cash is king right now.

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I don't know the message I'm sending by keep making these posts on Friday nights...Guess I'm not an exciting person LOL. In either case, it seems we are stuck in this range and rather than trying to guess which any of the numerous catalysts will break us out of it, I'm just going to let the chart do the talking. Until the price action breaks up/down, I'm going to continue betting small. I still do have a bearish tilt, which means I will continue my ritual of selling 100 shares when rallying and selling 1 put when dipping. My goal in this kind of rangebound market is to slowly grind out new highs (succeeding so far) while waiting for a much more favorable market environment to buy in size. Closed pnl here.

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Still alive and new highs. Paradoxically, the market is a great way for me to ignore all of the supposedly crazy shit going on in the world. I constantly remind myself that the world's the same it has always been--it's just that every bit of drama is now instantly propagated across the world with the goal to outrage, shock, and provoke.

A great bit of irony is in full display as now the same NBA that turned its Progressive Wokeness to 11 are now urging its players and management to "only be about the sport and not politics" now that China is involved. This is the power of capitalism folks; nobody actually believes in anything anymore. Just google what is happening in Xinjiang and yet the NBA can't wait to get over there. Everything is a brand and content doesn't matter. Think about the Chinese Communist Party. Are its policies actually Communist? Or is it just a Pepsi to distinguish it from America's Coke? Power and money is what drives every society once we figured out how agriculture. Everything else is just a team logo.

Note that I have no love for conservatives either. I'm distrustful of all large nexuses of power, whether you call it a government or corporation. I guess the only thing that matters to me is the Second Amendment LOL.

Oh wait this is a stock market journal, not a bitch and moan journal, so let's get to it. My original goal in starting this journal was to stay disciplined and not lose my marbles every time there's a correction. I'm proud to say that I finally traded through a correction in the proper way--as in according to my strategy. Below is a visual of the current correction for the Qs vs my portfolio, which made a new high on Friday.

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Did I do everything perfectly? No, but the major two points of basic trading were done correctly.

1. The thesis is on the right track or at least not outright wrong.
2. I acted out the thesis in a logical manner.

Now here is where things get difficult (as if it were every easy LOL). I currently have very light exposure as I'm still short term bearish, but we've been rallying pretty strongly. If I'm off base, all that alpha would be negated in the ensuing pump, but there's no choice here. Sunday is my big research and reading day so maybe my opinion will change, but as of now, I will sell 1 put per day if we rally. If I'm wrong, I'll still make a bit of money, but I'm a petty and spiteful person. Nothing will make me happier than me being right about another dip while holding mostly cash.

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New broker's very low (not quite zero) option commissions are great for your system. It allows making adjustments each day by selling just 1 or 2 options. Also, if the few weekly options sold one day move quickly, they can be bought back the next day
(say sell at 0.60 and buy back at 0.15 after 2 days still 2 days from expiration). AMRN has good weekly premiums and volume and narrower bid ask spreads now because of up coming Nov. 14 FDA meeting. I am only using your great system on 20% of my AMRN shares because a much higher buy out is possible. I am using selling weekly puts to add shares, also. AMRN huge gaps is maybe worst pattern for your system but I am still ahead. Price jumped 18 to 22 then fell to 15 on secondary and GS dumping on AMRN in a few weeks.
 
Hi vanv, I'm glad to see my journal has been helpful.

I've been toying with the concept of risk tolerance since I was trying to think of a benchmark to compare my returns to. I knew it had to be comparing risk-adjusted returns and intuitively, it made sense to compare to an index (or etf/mutual fund) with similar risk (volatility). But this got me thinking that an individual's true risk tolerance isn't static or slow to change like his personality, but probably much more prone to vacillations due to external influences. I guess this is similar to when doctors theorize whether patients can truly understand and give informed consent, but for individual investors--until they live through those black swan moments (both up and down), do they really know their risk tolerance? My theory is that the vast majority don't and they end up upping or lowering their tolerance levels at the worst moments--after the lion's share of the big move has happened. Maybe that's what moves markets: people constantly recalibrating their risk tolerance to fight the last war.

Even if I am aware of this psychological issue, how do I guard against it as I know I'm great at rationalizing bad decisions like everybody else. It struck me that by comparing my risk adjusted returns (alpha) against a bevy of different portfolios with three different beta (risk) points, I can take stock at whether what I'm doing is actually worth it. In other words, my journey is only worth it if in the long run, I can sustain a greater risk-adjusted return than low, moderate, and high risk passive funds.

So I compared my returns vs AOK, AOM, AOA (conservative, moderate, and aggressive iShares offerings).

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These are my returns since late 2013 (when I formed my LLC account) so I'm not cutting out my formative years. If I'm reading this correctly, I get about 2-3% alpha annually so this is great, particularly because of my extra shitty 2018, which forced me to create this journal in the first place. My goal will be to start posting these regularly every month to get a feel whether I'm on the right track.

Right now, I'm back on the bull bus, at least looking to the next week or two. Further out, it's still a bull market and we got to give it benefit of the doubt until something cracks. Like the old saying goes: nothing more bullish than all time highs.

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October risk-adjusted returns:

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Only change was swapping out the conservative allocation benchmark for a slightly higher risk one. It was too easy beating the conservative allocation across all timeframes. For a quick reference, here's what the benchmarks actually hold:

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Current portfolio:

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Here's an updated Trading Strategy in detail here.
 
I think we are beginning to see a similar melt-up like late 2017. It's such a hated rally coinciding with a general synchronized global expansion. Let's not forget the Fed doing not-really-QE-but-we-all-know-it's-QE song and dance. My baseline case is that dips are going to be shallow and to be bought with both hands. Still, we have to respect the inherent risk of staying too long in an already old bull market alongside the continuing China-US psychodrama. Other secondary bear items include DJTs and R2000 not making new highs yet and China attempting to rebalance their economy while keeping growth strong.

Therefore, a target exposure of about 60% to the Qs makes sense. I straight up bought shares instead of selling puts to gain exposure and every time it rallies a bit, I will sell calls to cover ~10% of my exposure. However, I doubt the Qs outperformance vs SPX will continue. In fact, look for the international markets to finally start beating the US markets and value to start beating growth. Regardless, it's not a huge deal for me as this is a rising tides situation and TQQQ options provide the best liquidity.

For everyone who's bearish: the excesses of this market seem to be in mostly private equity while the stock market has been rationally skeptical of these unprofitable unicorns.

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Sold some calls as we kept rallying this few weeks, the last one being slightly ITM. I'm about 400 shares short of my target exposure, but most likely I'll keep that powder dry since we got to dip any day now...right?

VIX is near bottom of the range again and this is a good opportunity to talk about what this actually means. It doesn't mean that the VIX is bound to rocket from here. Rather, it means that there is now a larger set of events that can cause the markets to drop suddenly/VIX rise suddenly. It's like if it hasn't rained for a while and everybody threw away their umbrellas. Now all it takes is a little rain before everybody runs out to buy more umbrellas, driving up the price by a lot.

Regardless, the next 10-20% move is higher. It's just that we may need to see a 5-10% correction first to give a little tease to the ZH crowd. I've been toying the idea of selling my shares and selling puts to play this, but is it worth it to throw away my basis when the longer term trend is still up? I think the smarter move is to sell slightly ITM calls during rallies. If we dip suddenly, I can just buy more and weather the volatility. The risk of FOMO if the dip is smaller than expected is greater than risk of holding shares during a bull market dip.

The actual risk is that the bull market is over, which I emphatically believe is not.

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November returns below. Benchmark is an equally weighted iShares risk allocation fund family as a stand-in for a generic passive portfolio.
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I don't think IB calculates alpha correctly, but everything else looks to be right.

I will be starting to paper trade futures as es options make a lot more sense than these leveraged etf's tax and liquidity-wise. If everything is smooth, January will be when I switch over.

I will also be starting a side fund to lever up my base strategy 3x. It will be with a small amount of money, but I believe this strategy's base risk is low enough for me to lever without blowing up, for a while at least. Of course the risk of busting is always present due to leverage, but if you only do this with a low % of overall capital and continuously rebalance, it may be another avenue for profits.
 
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