One of the first things I have learned is that the TOS commissions are too high. Sheesh. I need to get my IB account upgraded to Portfolio Margin options. I'll use TOS and dough to figure out the optimal trade, then place it on IB.
I think I posted here back at the end of September that I posted a pretty painful loss on the first trade I made back from licking my wounds on the sidelines for a year. That loss was a statistical outlier for my rotation strategy, according to the backtests, a full standard deviation move -- I realize that now
But if I were superstitious or an adherent of magical thinking I would have taken that as a signal to give up on active trading.
Anyway, I modified my rules to include tight stops on my positions, in addition to hedging, and although I suffered a little bit of performance loss as a result, I have managed to grind back to break even these past four months. Whew!
Going forward, I am going to break the portfolio down into a couple of smaller segments and trade a couple of other strategies in tandem with the ETF rotation. I need to get the position size down. I am going to try out convexity capture hedging with the rotation strategy using TMV and SPX, and I think I can cut my position size in half that way.
Strategy No. 2 is short volatility ETFs, and this also involves convexity capture in terms of roll yield. Once I get portfolio margin options permissions, I should be able to reduce size here, too. That is a few months away.
Strategy No. 3 will involve selling premium. This will also free up a lot of capital. But I am not there yet.
I was looking at my Portfolio page in dough, which is the app I am using to trade options, and I saw that my long inverse ETF ZIV position was lined up on the screen right below my credit spread UVXY position.
Two positions with almost a 1 to 1 correlation, being both short VIX.
The amount of capital consumed by the options trade is 1/10th that of the long equity trade, but nevertheless the PL on the day was 3 to 1. And moreover the options trade is defined risk while the long equity trade is undefined risk.
Wow. I had heard all of this before, but it took seeing it on the screen to make it real.
As for Strategy 2 Vol: This has been a hell week for me with a long equity XIV core position. My indicators are still lined up, so I will hold the position, but I am beginning to become very doubtful about the performance of XIV and think that it may be better to just short VXX. Honestly, these Vol products are sort of a maze, but slowly I feel I am getting to the core of the matter.
Strategy 1 Macro Rotation: I decided to sit on the sidelines with my rotation strategy. I did very well with bonds and also SPY over the past three months, but at the start of the month I felt that for now I just wanna go fishing with the core portfolio. Especially bonds.
Strategy 3 Learning options: I've got a 3 to 2 win/loss ratio, and that's encouraging. The losses have been mainly due to learning the mechanics. One of the things I have learned is that I have to get up at 5:30 in the morning and catch the market close (I have never been able to get up at such an hour, but I have been doing it, and if that is what I have to do, go totally against the grain and change my entire fucking life trade, then I am going to do it).
Another thing I have learned is that I really have to watch the liquidity on options, to just stick with the big names and forget about chasing the small fry on some lame directional theory. Those freaking market makers are just lickin their lips when you place a trade with a wide spread.
Another thing that's become clear is that FOMO is bred into the bone of my trading mentality. I cannot just make a rule or say that I am not going to chase or the like, I have to actively question my motives for placing a trade. Afterward, I am finding, when I look back on a trade that I made on my own trading ideas I usually see a FOMO element. Damn! There I go a again! It's a knee jerk reaction.
OTOH I resist the idea of contrarianism. But maybe this is the medicine to fight against my FOMO mindset. I put on a couple of contrarian trades in bonds in the past couple of weeks, and both of them came through with perfect execution. One credit spread in TBT I managed the win at 50% after about six days, and I came away feeling that I had really done a good trade for the first time ever. Size was small enough that I did not give a shit about PL, just getting the trade.
Finally I feel like I am starting to get into the "ain't called catching, it's called fishing" mentality that was my starting point for this journal. I just need to keep the momentum up and make a bunch more trades and keep the size down. I can always scale it up later, once I really know what I am doing.
Starting this week, I have ratcheted up the game and been getting up at 5 am to trade the market close. This is damned painful. As a lifelong night-person, trying to trade the open and then the close of the NY market from Japan is a severe test of dedication. Almost makes me want to move back to the US just to trade. Just kidding, no decent ramen in the US.
Still sitting on the sidelines with my macro Rotation strategy. Thus far doing nothing is working out for Feb.
Strategy #2 -- Still holding my core XIV position at 29.95. Now that both the Greeks and Germans have blinked, and earnings are mostly over. VIX is settling down some. If Putin would just put his dick back in his pants.
I am keenly aware of the fact that I had plenty of chance to get back into XIV at 26, which is where my indicators said to, but I was too scared and/or lacking faith in the strategy. I think I entered around 29 merely because that number was anchored in my mind back in October, when I first started paper trading Vol.
Secondly, as for Trading Psych. This week for the first time, I took a couple of contrarian positions with the aim of starting to combat my FOMO complex. It's becoming clearer and clearer, once I go back and look at the logs, that there is an element of FOMO in almost every discretionary trade I make. Damn. I now have a trading plan pre-trade checklist with a box that says "FOMO?".
"Once you know better, you do better."
So I put on a one contract bullish March credit spread in TLT on at 128.47 and a one contract bearish March credit spread on in SPX at 2050. These trades are small enough that I don't really care if they are both losers. The point is that they are contrarian, and that sticks in my craw. Goes totally against the grain. I wanna chase momo.
I put on another contrarian play this week in USO, a bullish Mar 16.5 17.5 vertical, on the thesis of mean reversion with oil. That one has surprised me by working out (why would I be surprised, well, or course because I am negative and pessimistic by nature, which is Trading Psych point #3 for today). I am currently at 35% of max profit on that one and look to take it off at around 50% next week.
Finally, to wrap up, my UVXY position from 1/28, a bearish Mar 25 26.5 vertical, is now at 40% of max profit at day 16, which you could say is right on schedule. I look to take that off at 50% next week. Then again, I might just let it run to 60%. In self criticism, at 10 contractsthis one is sized too large for my level as an options trader. I realize that now. Maybe the best thing for my development would be for this one to turn out a loser, because that would convince me to keep the size dialed back until I get my legs under me better. Nah.
OTOH, if this one works out, it will be a convincing demonstration that I could transition my Strategy #2 Vol away from long equity to options. I don't like being long XIV period. I would much rather trade Vol defined risk. For that matter, I could do Strategy #1 with options. That's basically what I am doing with my TLT and SPX trades from this week.
Long post. I am learning a hell of a lot. Finally feel like I am gaining some traction here.
The following user says Thank You to suko for this post:
Another thing I learned since starting options is the importance of liquidity. Big factor in two of the three losers I have had to date. Bid ask spread way too wide. An early object lesson.
This is the result of choosing underlyings based on some news or fundamentals related financial infotainment, instead of just looking at the numbers. The too clever-by-half complex. Gotta start out always with scans based first on volume, then focus on the spread.