Just before the new year I made a resolution to start a trading blog that tracked each of the individual strategies and tracked my portfolio as a whole. I began blogging on January 1st on my new blog site Trading with Krugman
Because of the fact that I am tracking my entire portfolio which includes stocks, futures and options I thought it would be more appropriate to put this in the Global Markets forum. My trading strategies do include trading FX futures and selling options in the FX futures market. I may eventually start a thread in the āTrading Systemsā forum where I isolate out just those specific trades.
I will be posting an introduction video below which should answer a lot of questions off the bat. I will consider this a journal and continue to post updates as I find time.
Feel free to ask questions or comment but no banter or side chatter. I would like to keep the thread clean and on topic.
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Here is a formal video introduction of who I am, how I got here, and the trading strategies that a use
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2019, the Year of Green, Green , Green!
Hello to all of my fellow traders! Welcome to my first post in what I hope becomes a very long running blog. My plans for this blog is to discuss trading techniques, specific trading situations, and life in general; and to do it in the comfort of my own website. This blog is going to become an outlet for my stream of conscious.
I wanted to make sure I got my first blog post out today because I like the symbology of starting something new on January 1st. I had already made a new years resolution to begin a blog and generate consistent content throughout the year. I would say this is getting things kicked off on the right foot!
Without further ado, let's take a look at my trading account to get a baseline where my positions currently sit.
I currently have 2 long stock positions in ABBV and MMP. These are long-term buy and hold positions that have a high dividend yield. On my ABBV position I am selling covered calls for additional yield. A 30 delta call with 60 days to expiration is currently yielding 2%.
I also have 2 short straddles in QQQ and XLE that are currently inverted with 45 DTE. Those were straddles that I sold during the big selloff in December but I was forced to quickly roll them out in time and roll the calls down into inversion to protect myself. The big post Christmas rally has placed the positions in better equilibrium, but the situation was getting a bit hairy in that last week of Christmas.
I will discuss all of my current positions in future blog posts and eventually get around to discussing general technique and strategies. For now I will wrap things up and leave you the way I started, with this motto, "2019, the Year of Green, Green , Green!"
QQQ Core Portfolio Position
Today I wanted to take a look at my QQQ options position which is the core position of my portfolio. What I mean by "core" is that this is where the bulk of my positive theta is coming from and also the position that I use if I want to adjust my portfolio beta-weighted delta's.
The graphic above show's an inverted strangle (156 put/152 call) with an extra naked short call (161 strike) as a negative delta kicker. This is a 42 DTE position. Maximum profitability falls between 152 and 156 with $1,475 of credit. Breakeven is 137.50 and 166. The maximum potential credit would be about 8% gain to my overall portfolio. That is a huge gain when you consider this is for a position that will expire in just over 1 month. Also consider that this is not my only short premium position as I also have covered calls on ABBV and a straddle in XLE. Maximum potential profit on all of my current positions is around 15% in just 42 days.
I am not trying to count profits that I don't yet have but rather taking the opportunity to show how profitable option selling can be. In the real world these positions will not always expire at max profit and may require defending and possibly result in a short-term loss.
One key component of this position is that it is generating $20 in daily theta decay. The other is that it is generating almost -40 beta-weighted delta's. That is important because in my previous blog post I had mentioned that I wanted a portfolio closer to delta neutral, especially while market volatility is as high as it has been. My QQQ position is doing just that as it is generating about 90% of my portfolio's negative delta's.
This position will likely remain in place until volatility drops too low. In which case I will switch from dynamic delta's(via short options) to static delta's (short QQQ directly). This position may become "less core" as I add on more short premium positions down the road, but it will likely continue to be the dial that I turn to get my delta's adjusted just the way I want.
Back into the Fray
After enjoying a nice 16 day break from work I am officially back into the fray. I was greeted with a request to get ready for a business trip in 2 days. That is not exactly what I had planned for my week, but when duty calls you do what you gotta do. I did have to complain to my wife about it, but after a little bit she told me to quit complaining and book my flights. She seemed a little too eager to get me outa here :P
Needless to say I am booked and ready to go.
On the market front, things were mostly green today. My short premium QQQ's position was in the red due to another decent sized rally today and volatility honestly didn't contract too much. XLE was near flat on the day and my buy-and-holds rallied good. I am now green for the year (by a small %) and only down 0.3% since the carnage in December, so almost fully recovered that 10% draw down! I am sitting very neutral with my portfolio at exactly 0 delta's.
Looking at the futures after close today and there seems to be a rising wedge on a number of charts. Only time will tell what becomes of it but it does have some bearish connotations in my opinion. Price in the QQQ's is near pennant resistance and overhead horizontal resistance, although I could still see price rallying as high as 160-161 before bumping into more serious resistance.
Hey Krug,
This is all pretty highbrow for the individuals here who are accustomed to spot speculating, at least the understanding of options, which is far more advanced from a technical understanding (delta, theta, implied volatility and decay)
Can you go over the basics of options, how they compare to the spot markets and the key differences? Even from a vanilla point of view, iād certainly be curious myself.
Cheers.
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@BaconSandwich it is my intention to start an options selling thread over in the Trading System forum when I begin selling premium on FX futures. I am not selling premium on FX futures right now but should be in a few months. When I do I will likely start a thread on the educational side and use my live trades as a learning aid.
I am glad to see interest in it!
Sounds like a good idea, iād personally like to move to options next year - limited risk is a huge attraction, however iād like to fully understand the limitations against what is available with Spot speculation.
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I think you will like it. I like doing both(spot trading and premium selling) as a little bit of strategy diversification.
With options itās like taking a slow escalator up the profit curve and sometimes taking an elevator down a few steps. Essentially you are collecting theta decay (what the person that bought your option is paying you, called the āpremiumā), and a little bit of theta is coming out of the contracts each day. If there is a large, outsized move, that is when you might see a sharp loss.
The reason options selling works is the same reason auto or house insurance companies work, the premium sold often times overstates more than the claims received. Implied volatility (what you are getting paid for) overstates real volatility (the actual volatility after-the-fact) about 90% of the time. If you only count times where the implied volatility rank (IVR) is high and that number is higher, like 95+% of the time.
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Implied volatility is mean reverting, so I wait until the IVR is high (greater than 30 or 50), and it increases the chances even more that real volatility will likely not move outside of what the option has priced in. That difference between IV and RV is the edge, and is where profit is made.
Sounds like I need to get access to an options platform and see this in real time - I assume there is a min deposit with this sort of trading? Selling 10,000 barrels of WTI in the spot (speculation) market has been no fun the past week. Must have dropped a good $10k in bets that I didnāt intend to take, damn Christmas spirit.
I try to keep things at 1x leverage, so I wouldnāt sell /CL premium unless I had about 50k. If I wanted to sell /6B premium I need around 75k. You could probably get away with 2x leverage since the positions start at delta neutral, but iām not trying to be a hero so I keep things on the safer side.
I have an XLE short premium trade right now, which is a pretty good proxy for /CL futures. My short premium is pretty profitable right now. I sold when the IVR was 100% and so my options have a very, very large expected move baked in. Even though price has been rallying almost every day, the volatility contracting has offset losses on the delta side.
How high volatility is when you sell options has a big impact on win rate and average P&L.
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Iām assuming the correlation between CL and WTI Spot is there or thereabouts, at least from a general trending point of view. Iāll open an options account in the next week and see what all fun and games is about. Lots to learn in that area.
Again, I use about 5:1 leverage in Spot, so this will be an interesting shift.
I use TastyWorks because the feeās are nearly unmatched and the software is designed around options selling. The runner up is ToS at TD Ameritrade. Feeās are astronomical but the options part of the software is decent.
With leverage, what I mean is how much of a positions notional value to my account size. Options have about a 5:1 leverage, which is nice for capital efficiency. Futures can have 10:1 or more. That is all fine but I make sure my active positions notional value doesnāt exceed 1x my account. I currently have a short QQQ trade that is worth about $8,000 of notional value, but the buying power used to hold it is only about $1,600. I am watching that notional amount to know my true exposure.
In Forex it is pretty normal to have 5:1 notional exposure because you are trading relatively small movements. In options you are fully exposed for wider swings, so a 1x leverage is safer if there is a gigantic 500+ pip movement.
Absolutely, thatās the logic behind spot too - which you obviously know.
Anyways, as a UK resident I recall that ToS is out of bounds, might have a casual browse at IB and see what they have to offer.
Ah, that may be an issue with TW as well. Right, IB may be your next best bet. There are a few others I have looked at as well with an international presence.
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This is what throws me all the time, because I cant find my arse from my hand even at the best of times. But if youāre in a āCall Optionā (going long as the Spot equivalent), then a flash crash wonāt affect you right, because you have a strike price which is the underlying price at expiration. Am i wrong here, this is the only reason why Iām curious around options - to firmly limit risk, regardless.
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Yes, a short call only has risk to the upside. One of the most important greeks is delta. If your option has negative delta, then you will lose as price rises and profit as price drops. Delta tells you your % exposure. If you sold a naked 30 delta call, you are essentially short 30% of a full futures contract. Deltaās are dynamic and your exposure will change as price rises or drops.
Options marketās are pretty efficient so whatever extra risk there is to the downside will cause putās to pay more out, called put skew. In the 08ā crash, at the most extreme, puts were selling for 9x the amount of calls. So whatever direction the risk is you will get paid for it through skew.
I always sell puts and calls together to get a delta 0 position. I can lose on both sides but it increases profit and cost basis a lot more than selling just 1 side. Although I would consider selling just 1 side if I had a directional bias and wanted to profit from both direction and theta decay.
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Right - So 2019 new years resolution is to hire an options trader for a full low down, and to see just how feasible it is to transpire my current spot approach over to options. Having a fixed limited risk to positions will certainly help me age a lot slower.
I need to get to get to grips with this inside out. Iāll keep an eye on this thread and what you have to say.
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