2018 Incident Report (Part 4)

Today I continue with an unfinished July 2019 draft evaluating my 2018 trading performance.

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Other considerations regarding the problematic strategy include:

• When to get the calls involved?
• Make some sort of checklist and record data daily. Take preventative action no matter what. Consider limiting position size so I always have some powder dry (have I been trading too large? Or keep trading this size but don’t change for a while). Checklist should have a number of items and the decision whether to take corrective action should depend on total checklist score (this will be too subjective for backtesting especially given limited number of occurrences of significant corrections per third paragraph here).
• When I roll, I’m starting at a much greater price (e.g. $12 – $14), which has a much higher delta. If the market continues to trend from that point, then those options quickly become $20 – $30. This makes me horribly uncomfortable. Until I find something better, exiting at first instance is a better choice than rolling.
• I want to test taking significant action on the biggest losses in X days. Looking over the whole set and making this decision is committing a future leak. However, plotting the difference across a range of X (e.g. 5 – 100 by increments of 5) or maybe a WF approach using largest in the last two months seems interesting [are both approaches the same? Even with a WF approach I have to figure a way to determine X].

With regard to my trading on Oct 24-25, 2018:

• I’d like to talk a bit about my trading mistake from Wednesday where I said to myself, “I’ll just go ahead and sell [harmlessly] an $8 call to recoup some of my losses.” When the market retraced half its huge Wednesday decline on Thursday, I felt horrible looking at a $20 call. I got little help from volatility despite VIX being down two points. A better way to approach this might be to look at the projected option price with the market retracing at least to the opening (high) price from Wednesday and to assess my risk tolerance. Another possibility is taking a 15-60-minute break from monitoring positions. While I risk seeing a horrifying DD when I return, I seem to pick the extreme in too many cases (e.g. closing the call on Thursday around 3 PM only to see SPX give back 10 of its 60 positive points into the close).
• I am not convinced TA is any better than 50/50. What it can do, though, is put some definition around what I’m doing such that my trades are consistent. Maybe I only go long (short) into an overbought RSI. Maybe I only go long (short) when I see a confirmed close above a previous candle’s high (low). At least this avoids me looking at the market, freaking out, and chasing only to watch (a short time later) my decision be proven horribly wrong after a reversal. This aligns with Goal #3 that I have discussed previously.
• It’s sloppy trading when I am forced to trade in fast-moving, wide markets and cave in huge amounts of money to get filled (especially when, two minutes later, I see the fill could have been had for a much better price).

I will continue next time.

2018 Incident Report (Part 3)

Today I continue with an unfinished July 2019 draft evaluating my 2018 trading performance.

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These possibilities aside, one thing I can do is have a system for when I get into trades and when I stay out. Maybe I use something like the STFS and never enter when the trend is going against me. Maybe I use a simple pivot system and only enter long (short) at a buy (sell) signal. Maybe I watch the price for a time period and enter a limit order that seems reasonable based on recent trading activity. While none of these ideas will guarantee I get better fills, they would all provide some objective framework to follow. If nothing else, at the end of a trading session I could say “I followed my plan.” Ultimately, that may be the most important thing anyway.

Related to Goal #3 is a thought I’ve had about day trading futures. This would give me extended face time with the market and help me to become more comfortable watching. Trading futures can also hedge my option portfolio if I am trading the trend while having theta positive option positions in place.

Trading futures may also help me find some “co-workers.” I’ve had one heck of a time finding serious option traders around. I might fare better finding futures day traders since “day trading” seems to be a stronger buzzword than “options.”

In addition to having a defined approach, all of the above would require me to spend more time looking at the market. This brings me back to Goals #1 and #2 described previously.

With regard to the worst sales pitch ever, here are some ideas I have for potential trade indicators:

1. IV % increase (consider closing if IV has increased 30-50% when the position is losing money)
2. Option price (regardless of M/S, I’ve found level of comfort and strength of discipline to be inversely proportional to option price. Delta may be a confounding variable as higher-priced options move faster in terms of gross amount)
3. Distance OTM (some efficient frontier exists between moneyness and days to expiration. This may be hard to define but I know it exists)
4. Number of contracts (I dare not call this “position size” since other things play into the latter like notional risk, PMR, etc. I may look to change my trading to a fixed number of contracts per month rather than a dynamic approach where I trade every day despite the DD improvements enjoyed by the latter from time diversification. PMR is proportional to number of contracts)
5. ATM IV:10-delta IV (the idea here is to take note of vertical skew. A steeper skew may or may not be the time for me to be in the market: need further testing. Another approach could be to monitor delta X% OTM. This would change with DTE. I may have 12 data points per year, however, and it might [not] be useful to determine a percentile rank for where the current ordered pair fits into the whole distribution)
6. Technical analysis. While I won’t believe in untested strategies, I may be able to specify criteria for entry, to stay out, to add new positions, or to sit on my hands. Things to watch could include trend direction (e.g. 8/34 crossover, price closing above/below 5/20/200-SMA, slope of 50-SMA), $TICK strong or weak (tags of +/- 1000), etc.

I will continue next time.

2018 Incident Report (Part 2)

I left off reviewing my 2018 trading performance (originally written June 2019). This is part of my year-long quest to get more organized by converting incomplete drafts into finished blog posts.

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Part 1 concluded with three goals for the coming year.

#1 addresses the observation that I really don’t like looking at the market. My style of trading has generally been “no news is good news” even though news has so little to do with any of it (see paragraph below excerpt here). When I get around to checking the market (and subsequently trading), I sometimes notice holding my breath before the visuals display on the screen with a subsequent sigh of relief when I realize things are under control.

Filled with trepidation is not exactly the way I want to approach my job on an everyday basis. I think the worst sales pitch ever has something to do with that concern. I would much rather look at the market with anticipation, calm assurance, collectedness and confidence, peace, security, contentment, and serenity: choose a synonym.

Goal #2 addresses the fact that I typically check the market once daily. I should look more often especially if I get into more frequent trading like Weeklys (I have seen both positive and negative reviews).

Goal #3 pertains to a feeling that I usually end up getting bad fills. A bad fill is when I pay $3.00 for something only to see it cost $2.60 a few seconds later. Reasons exist for this sort of thing to happen (e.g. displayed bid/ask shrinking when someone actually places an order, market makers wanting to transact toward their side of the natural to realize bigger margins, etc.). The only way I can ensure this does not happen is to place an order for an advantageous price and then wait for a fill.

Goal #3 is related to #2 because I can’t always accomplish this by popping in and out once to check the market. I may have to sit with the market, watch the chart, perhaps work the trade, etc.

I have a couple ideas as to how to achieve #3. One possibility is to create trading strategies that give me leeway to pick up my bat and ball and come back another day when conditions are more advantageous. Another possibility is to only enter trades that would be down money right now if placed on a previous day (or bar). If the backtest as a whole looks good, then I would think being more selective and getting more advantageous entries should be added benefit. The drawback would be a [small?] percentage of trades that would have posted zero MAE. Missing out on these trades may lower my overall average profit.

I will continue next time.

2018 Incident Report (Part 1)

I have been getting more organized this year by converting incomplete drafts into finished blog posts. Completing this draft made me realize I was overdue for a performance report.

As it turns out, I had a never-completed mini-series from July 2019 about my 2018 performance.

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Originally, this was supposed to be an incident report of major losses suffered the week of October 8, 2018. Now, it’s going to be an incident report for all of 2018.

After having my best year ever in 2017, 2018 was decisively my worst (including 2008 when I actually made money). I took big losses in February, October, and into December.

One of the biggest sources of both frustration and optimism is that whenever I experience big losses, I always seem to be able to look back to a point where I can easily say “I should have gotten out” and avoided the worst. The big question is whether these points are visible prospectively. Anything knowable only in hindsight is mirage and not a useful indicator.

I feel like I need to do a few different things every day to maintain trading preparedness.

First and foremost, I need to develop a checklist with daily monitoring parameters. I will take pre-planned action when triggers get hit. The main focus of my trading will then be to follow the checklist: no questions asked.

I had a monitoring spreadsheet created this year for naked puts. I stopped using it once I closed partial positions. My discipline waned throughout the remainder of the year. This needs to be iron clad throughout. Discipline, in the trading business, may be said to be everything.

One repetitive theme I have noticed about myself is that when I stop the bleeding, I rarely stop the bleeding. If I use some sort of equity stop-loss or [set of] indicators to determine whether I am in [for at least a percentage of my standard size] or out of the market [entirely], then that needs to be it. I always seem to fear the whipsaw. I fear being out when the market suddenly reverses thereby leaving me on the sidelines. This fear has not helped because time and time again, I have maintained a partial position that proceeded to aggravate my losses.

Here are three things to work on for the coming year:

1. I need to feel comfortable in the markets.
2. I need to look at the markets more.
3. I need to have an approach to trading when I actually trade.

I will discuss these further next time.