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Option Side: Welp, I said yesterday it'd be a big up day for my NLV or the market would take a big dump. After the Fed announcement it certainly looked like the former as the implied volatility started to shrink. I was up about 1000, but then someone (Powell?) said, "Oh, don't get used to this. It's a one-off" or something like that, and BAM! Free fall. I ended up down about 1850. If there is carry over tomorrow, I will have to close or roll some Puts. And that will come at a high price, but what can you do?
Day Trade Side: What an exhausting day! Trade went in the dumper right at the beginning. I was down over 1000 before I even got my third leg initiated. Down almost 1500 before the announcement, and just about at my bailout point. In fact, if not for the announcement upcoming (which I figured had a better chance of helping me than hurting me since I was so far down) I would have exited. After the announcement, it did get a little better, and when I got to -1000, I exited 1/3 of my position. At that point I seriously considered just calling it a day. 1000 wasn't too bad, and the Option Side was doing well. But then the big dump. I closed some of the long position, but not all, and eventually I got to even, and then up 600. The market rallied about 40 points (FAKEOUT!!) and I exited +151. A miracle that I was positive, but a very unfun day. Didn't I just say I loved this game? Wow, miserable today.
It made me take a look back to the last Fed day, and I got beat up pretty good then too (though the Option Side was positive that day). My initial thought was that 2:00 PM announcements aren't suited to my methodology as I have my entire trade on by then. Contrast that to Friday when we will have the Employment report. Typically a big mover, but I will only have a small percentage on by 8:30 am. My remaining legs can negate my first trade if necessary. No such thing when the big news is at 2:00. However, the flaw in that theory is that I got beat up BEFORE the announcement today, and actually did better after. And it was the same last time. Terrible start, and then better after the announcement. I think the takeaway is that I need to sit out on Fed announcement day. It's just not worth the hassle and potential risk.
So all in all, it was a good month. I really can't complain. The day trade side did better than I have any right to expect and the option side was profitable after a down June. Although it's quite possible August will get off to a bad start on the Option Side. I am in need of a rally tomorrow, and I don't like to be in a position of needing a certain direction. We shall see...
Why was I so far off on my estimated loss for the option side in yesterday's wrap? It has to do with the way IB calculates +/- for the day. They display the number based on, primarily, bid/ask spreads. So when the volatility pops at the end like it did yesterday those numbers can get inflated. On my screen it showed me -1847. But the statements I get in the morning are, of course, based on the settlement prices. Normally those numbers are fairly close, but as is seen here, there are exceptions. As far as I can tell, IB never updates the screen to show settle prices, just current value based on bid/ask and resets when the new session begins at 6:00. If anybody knows a way to display settlement prices, I'd be happy to learn something. The day trade portion on the other hand is completely flat at the end of the day and IB properly displays profit/loss even including commissions. So that number will almost always be correct except for the rounding.
* Total is since June 1, since I started this journal in June and June 3 is when I switched to using the micros in the daytrade portion.
Option Side: Welp (again) a great day went sour. Was up over 3K when we got a glorious Trump tweet, and the market started getting hammered. In 15 minutes I went from up 3K to negative. Thanks Trump. Probably would have not been negative on the day if I had made an orderly exit, but I didn't. The bane of option sellers is getting demolished on a big run/volatility spike. Is this the beginning of a big crash? Most likely not, but I don't care. I exited every single trade I had, even the calls. I am completely flat and may stay that way for a while. The option selling hasn't been all that profitable lately, and anyone who has traded options for a long long time knows that one horrific move can wipe out months, even years of profits. No thanks. Down 263 on the day, which doesn't sound horrible, but thanks to losing 3K in open profits, it felt way worse.
Day Trade Side: Trade was under water most of the day, and oddly, did improve somewhat after the Trump bomb. But not enough. Down 107 on the day. I didn't do much with this today as I was busy with the option side. Shouldn't be a problem tomorrow.
Option Side: Certainly feel like I made the right decision to get to the sidelines yesterday. Still don't think this thing is really going to go down too much, but the volatility spike is not fun to deal with when you are short options. Maybe I'm just paranoid, but I am constantly in mind of taking big losses with this style of trading. I've done it before, and it is no fun, and it really beats you up mentally. There was a point where I really questioned if I knew anything at all. So, I am happy to be out and I'm not sure when I'll resume. Had nothing at the beginning of the day. Bought nothing. Sold nothing. Ended the day with nothing.
Day Trade Side: Not really sure how to present this. Because I had nothing on the option side, I did two units on the day trade side. Should I talk numbers per unit, or per overall $ value? If anybody has any thoughts, please let me know. In the meantime I am trying to think what future me will want to see when I re-read this journal some day.
It was somewhat strange from a psychological standpoint too. When doing 1 unit, I tended to consider lightening up if I got up to 1K profit. Or if I had been underwater all day and got back to even. And I'd lighten up some more if the trade kept working. So how do I translate that when doing 2 units? The trade bounced around for hours, gyrating between positive and negative territory. Then it finally started working. I got up 1K (500 per unit) and started thinking about closing some of my trade. Then I said to myself "you can't take the same size winners as you would with 1 unit and also take double the loss when it doesn't work". Recipe for disaster. So I started looking at the numbers on the screen and halving them in my head. That helped some, but I still ended up cutting my position in half when the trade got to 1500, and then cut 2/3 of what I had left when it got up 2K. I finished +2309, certainly a good day, but if I had held both units until the end, I'd have been up 3975. Definitely something to work on.
I don't know how often I will do 2 units. Could simply do that from now on. That's one choice. Or I could do 2 units until I resume the option trading. Or, alternatively, I could do 1 unit after a winning day and 2 units after a losing day. No Martingale here. 2 units max, regardless. A quick test of this shows that the profit goes up nicely this way, while making a relatively small bump in MaxDD, Something to ponder on over the weekend, and I'd love to get input from anybody with any ideas.
What software are you using to test these spread trades? I use tradestation and there is no easy way to write strategies for spread trading unfortunately.
I would recommend sticking to only 1 trade size (either 1 unit or 2 units) consistently, irrespective of winning or losing days. Given that the profit goes up nicely by doing 2 units after a losing day, have you tested the results of going up to 2 units on the same number of random days? I would venture to say that you'd get the same results.
Ideally, the only discretionary aspect of your trading should be the timing of the exits. As you have mentioned in previous posts, this is more art than science. However, increasing trade size (either inter or intra-day), or closing 1 leg of the spread only, should be kept to an absolute minimum.
I use NinjaTrader to run a backtest. Then I use another program that I wrote to run a Monte Carlo type simulation based on hundreds of thousands of trades. This gives me an overall idea of what might work, and what won't. I don't consider it truly actionable because it has the Ninja Trader backtest results as its input, and from what I've seen that's not very accurate. Sure would be helpful if it was. But again, it gives me a quick way to evaluate a rough idea.
