Two Years of Trading Dangerously at 84% Annualized Returns

[InTheMaking]

Is this accomplished through discretionary trading as you watch live price action on your 40 underlyings or are trades executed through algos?

90% discretionary. Algorithms can't chase this kind of return. Or least I don't know how to systematize this.

I have written some python scripts that are set up to give me alerts on price action, certain delta numbers and theta/delta ratios and my account info (margin cushion/excess liq/cash balance). But these are just guidances than anything else. At the end of the day, its just heart-racing, index finger on a 12 year old corded 3-button IBM mouse connected to a 4 year old lenovo laptop running windows 7, good-ol discretionary trading.

The reason why trade 40 underlyings is because that's how many underlyings I can see on my IB risk navigator window without having to scroll down, at least on my current multi monitor setup.

 

[toc]

Sorry, i meant 10k contracts a month. It's probably spread across 500 to 700 trades a month, 20 trades a day. Each trade may scale up to 20 contracts. I don't go 20 contracts all at once. I usually let it come to me as lots of 2, 4, 6, 8 at lower and lower prices. Saw this technique on a YouTube video

Is it the Martingale Strategy that you are employing i.e. more price goes low, the more contracts you add to the position.

Very risky and especially if one cannot get the courage to bolt out of the trade once certain threshold is reached.

 

[InTheMaking]

Is it the Martingale Strategy that you are employing i.e. more price goes low, the more contracts you add to the position.

Very risky and especially if one cannot get the courage to bolt out of the trade once certain threshold is reached.

I don't know the names of these strategies. Is it martingale? Who knows. I add positions depending on how much neutralizing delta I need. We all have "core" positions that we start out with, then we hedge it with something else. Till the hedge becomes the core and it's a constant game of re-adjustments while earning income.

Case in point, I was heavily invested in consumer staples back in march/april of 2017. I had a strategy that would give me 5% return per month. Everything worked fine till AMZN decided to buy Whole Foods! It shocked my account by 10% and none of hedges (put backspreads) worked. They were too long term and provided only margin protection, not asset value protection. It took me 40 days to recover. It was the most depressing time of my life. To see you account cross 7-figure and come back down to 6-figure. So strategy changed to shorter term long puts that I load up on lowered price and hedge with, what else? going long on AMZN. I found that a modern portfolio cannot NOT have AMZN exposure. They're in every space of our lives! Long story short, the AMZN hedge has grown to around 7% of my portfolio value today.

 

[InTheMaking]

I'm a smaller fish when comparing my account to yours. I've been trading options in DIA, SPY, and QQQ, since their inception, plus I'm holding 12 Mega Caps positions, I haven't touch a potion since January 2nd, I've traded option for 30+ years and also don't understand the 10,000 trades per month.

We're all small when we start off. I remember my first actual "trade" that I made on april-14th Thursday of 2016 (my account was mostly invested in one particular NASDAQ stock prior to that) I sold a straddle on SPY at 207.5. Closed it for $45 profit! Happiest day of my life. That just gave me the confidence to scale up.

I'm trying to start another small business in dallas, albeit the disapproval of my wife. We made 450 bucks last week. Again, really happy about that! So theres evidence the model might work and time to scale up. My point is, the size doesn't matter. Are you able to squeeze the right % of reward for a given amount of risk?

 

[jl1575]

Sorry, i meant 10k contracts a month. It's probably spread across 500 to 700 trades a month, 20 trades a day. Each trade may scale up to 20 contracts. I don't go 20 contracts all at once. I usually let it come to me as lots of 2, 4, 6, 8 at lower and lower prices. Saw this technique on a YouTube video

So that would be 120K contracts a year. then the math is if you made net $10/contract, you would make 1.2 million a year.

 

[InTheMaking]

So that would be 120K contracts a year. then the math is if you made net $10/contract, you would make 1.2 million a year.

I think the longer you trade you stop looking at things on a per trade basis, win/loss ratio and other detailed trade logs. I used to do that during my first 3 weeks till my excel spreadsheet was hogging up more memory than my tws session. 60 to 70% of my positions are losses because they are hedges against a market crash in this bull market that keeps going up like no tomorrow. Only 30% of positions are profitable, because they rise exponentially provided I acquire them for the right price and control the dreaded theta decay. But 30% profits are usually 3 to 5x the size of the 70% loss that I try to close at 50% to 70% value

Too many people on this forum tend to over engineer their trading methodology. I don't blame them, because I was an engineer too (electrical engineering). Just go gut in order to make money and then figure out a way to systemetize. Then go gut on starting a new position and systemetize. You'd be surprised how little backtesting I do before I deploy a strategy. Just can't backrest option Greeks like you can do on equity pricing. My back testing is try with 3 to 5 contracts first. If it works for 4 weeks, then go 5x till you reach 5 to 7% of your account value.

 

[jl1575]

Hard to do option back test. Only thing you can do is back test your strategy/ entry-exit signals and do a rough calculations, as prices move is not the same in option compared to equity.

 

[jl1575]

I have two accounts, one future and one option. The option account is always making money, as I place very few trades and wait for solid signals and the trades last longer from a few hours to a couple days. The future account, barely makes even, too many trades that cost huge commissions. and got impatient and revenge trading and act on insignificant moves. However, I spent 90% of my time and energy on the future account, and ignore the option account as a sideline. Reading your story makes me consider to seriously switch my focus to the option strategy that might help increase my account steadily. I have had about 80% profit rate on my option account as I only acted on solid signals, sometime only one or two trades a week, but most of time I just ignore it as it was a small 5K account and let it sit idled. In future trades (short time frame), once the trade goes against you, you panic and exited, in option trades (longer time frame), if the signals are correct, after a hour or a few hours, the trades would always become profitable. The ironic thing was when I doubled my capital in option account, I transferred the money to my future account, only to lose it all (mainly due to frequent trades that resulted in large commission fee). Time for a change.

 

[sle]

90% discretionary. Algorithms can't chase this kind of return. Or least I don't know how to systematize this.

Well, but of course they can. It totally mundane for higher frequency guys to post double digit Sharpe ratios and returns of a few hundred percent. With their capital turnover it’s not hard. Obviously, that’s irrelevant here.

Out of curiosity, what was your average $Vega and $theta during this period?

 

[sle]

Moved it over from another thread

Vega, I've tried to stay flat. Its gone from -2000 to 5000. 30/70 split between negative/positive delta on vega distribution.

Theta, when I first started out, I was always selling premium and trying to get 1 or 2% of portfolio value, So around 2k to 5k positive theta. Then after reading Nassim Taleb's dynamic hedging, discovered the magic of long options. Theta has been averaging 500 to -1500 ever since. I try not to never let this go below -2000. Again this all depends on market conditions. If I think of a consolidation or bearish bias, these numbers may flip.

Interesting. Do you think you were a net seller of risk premium?

My question is whether a retail trader such as you and me can algorithmize any potential high profit strategy to reach high double digit growths?

I am not a retail trader, so take my opinion with a grain of salt. I personally have smaller capacity strategies that produce double digit returns with really attractive risk metrics. With the right setup and approach it would be possible to replicate it as an individual trader. Plus, I know a few individual traders (similar to your size) that are making good. It is a tricky game that involves controlling expenses a lot (such as clearing and tech costs), but in the long run it's easier to make money since you are deploying small amount of capital and you are not restricted by a fixed mandate.