Little side step from our main topic.
Check this chart. I removed all Axis, symbols and reference to time frame.
Tomorrow I will tell you what chart you're looking at.
What does your work say; up, down, sideways. Time to catch the bottom or time to hit it heavy with short?
Thank you for all the emails over the weekend in reference to my Series 65.
As promised, today I will try to evaluate the August trade.
I spent quite some time in OptionVue Backtrader over the weekend to identify errors and possible improvements.
First what did the market present us. 35 days out we entered the trade at the 680 level. Within a week we saw 645, which was the down side edge of the butterflies. A week after that we had a temporary top of 727. 727 was passed the top side edge of the butterfly. After setting this top we had 10 days of consolidation. This consolidation was however quite violent, twice we were made believe that a break down of the 695 was in our immediate future. Then on 8/6 we broken out to the upside and currently we are setting new recent highs.
No regrets;
- I have no regrets entering the trade and pulling the 670 and 680 butterflies off. I still think that was a good decision. The alternative had been skewing the trade around 7/22 to the upside and leaving me open to 'fear and greed' on the two sell off 7/28 and 8/4. Yes, the butterflies would have made profits, but the draw down on the sell off days would have been way bigger than prior month profits. I think prior month profits are a limit of loss in upcoming trade month. To stay in business there has to be a strict relationship between average profits and max draw.
- No regrets for entering an new butterfly on the 720 level. The trade did not work. Again within 10 days the market showed us both side of the butterfly (and beyond).
Regrets;
- Managing the second butterfly did run away from me. At 7/28 breaking the 700 and approaching the 695 I got carried away. I was not longer trading the real market but the market I wished for. Reading all the economic analyzes I expected the market to fall apart and continue down. I made an adjustment to early and got caught. From there on I was hanging on my finger nails. Having cashed in a loss on the first two butterflies, wishful thinking entered managing the 720. The 720 butterfly has been up approx $800, with hindsight I should have taken that present and gone in hiding.
My results for this month are negative. I lost on a my Theta positive trades 75% of my July profits.
Before I close shop till the September options are 35 days out (this Thursday:)) I have a couple of other points to share.
One of my favorite economist is John Mauldin. He has a free weekly news letter, the last two weeks the news letter gave great overview of an important segment of his work. I recommend you read the newsletter dated 8/1 and 8/8. The section on P/E ratios and the section on the Baby Boomers are essential parts of his work. The P/E ratio is also excellently described in his book "Bulls Eye investing".
Over the last two weeks I "played" with a new piece of software of the Worden Brothers called Blocks. Blocks is the successor of Telechart. The good news is Blocks is free in a limited version with after hours data. I really like the software although for first time users it is not easy. I went to a (also free) seminar to get a head start. What I want to share is a chart I found within Blocks; see below. It is a cumulative volume indicator. In the graph below you see the indicator for several years. Check how nicely it comes down mid summer 2007, a great early warning signal that the Oct high was suspicious
Just finished a trial exam for my Series 65, passed! I needed 70% I had 78%, not to bad. Tomorrow is the real thing. Please keep your fingers crossed.
Today's market action was on low volume and difficult to read. This is the daily RUT future chart I have been looking at. The diagonal line was the break out I think happened on Tuesday. So depending tomorrow's action, Tuesday was a false break-out, or we retraced a bit deeper than you wish for a clean break-out.
This analyzing on the last "square inch" happens when you are still in a theta positive position so close to expiration week. Every little move starts to have a big effects due to the increase gamma. Yesterday an adjustment on the upside, today an adjustment on the downside. I stick with the trade for two reasons;
- Tuesday and Wednesday were positive days, today I only gave back a marginal amount
- the potential of the trade is still attractive.
But rest assure, I am glued to the chart and computer. For tomorrow I have orders in to take care of a down side adjustment (if needed)
Here is the butterfly:
Today was the second day in a class room. As yesterday, today I tried to work myself through an exam training course for Series 65 (Register Investor Adviser Representative) The teacher was great, but the exam specification have no relationship with daily live. Ears open to the teacher, eye on the market especially around 2pm when I saw the RUT moving up.
I end up making a small adjustment. At the time of the adjustment my delta's were over 60 short. The adjustment reduced those delta in approx half. Reducing delta's but not flipping delta's from short to long is quite essential when making adjustment in Theta Positive positions. Especially flipping from shorts to longs.
I am drained, to this is it for today.
At least one governmental official has now acknowledge that "Inflation is High" (Uncle Ben Aug 5th). However it did not scare the market.
The immediate reaction to the FOMC statement was very little. Volume in that 15 bar was the highest of the day. The Rut future only moved from 713-716, taking it all back in the next minutes.Only after the bond market closed @ 3:30 the stock market picked up.
I am happy that I don't need to make money directionally in this market. Of course the non-directional trading style has not been profitable this month. Consider the alternative go long here, or be the contrarian and short here. I still stick with my original suggestion - short term UP, but feel not sure enough to make a bet.
Portfolio wise this was a great day. You could have guessed that since you know I am over weighted in GE.
The remainder butterfly with all it's problems this month has become a positive trade. When we take it of the market I will write a 'full confession' on all the mistakes made.
Here under you will find the graph. Check the Greeks the closer we come to expiration the bigger role gamma starts to play. Currently we are short 22 delta with a gamma of 5. If tomorrow bring us a full ATR (16) up than the new delta is 22+5*16; over 100. For a 3-6-3 butterfly that is not prudent risk management. This means I am in a tight spot. I need some overnight reflexion on how I will continue to manage it.
When writing a blog, sometimes you regret stating an opinion, especially if the opinion can so easily be proven wrong by the market. Till 11:30 I thought great, of course I say up and we go down. Then we retraced; I thought great again a long tail. At 4pm I have to admit that today's action feels different. The low is lower, the up volume was low. The total volume was however also below average. As always the market will tell us in due time what it plans are.
Tomorrow Uncle Ben Day - since no interest rate is expected, everyone will be reading the text as if they are expert tea leave readers.
I have two graphs for you.
The first one is the butterfly as usual. The second one is the current butterfly after (a simulated) full downward adjustment. I like to be mindful of the potential profit of the trade after I commit myself to a direction. Currently the profit would be $1660.- with a BE point of 725. This $1660 gives me the peace of mind to sit on my hands while the market breaks 700 (as it did this morning in the Rut Future). Since I already have been taken by 'surprise' once (see 7/28) I can not afford to let it happen again.
All in all August has proven to be a long month, am really working for my money :)
And 49 days till September. To early for me to look for September trades. Especially with the RVX lock in the middle of its range. If the RVX was relatively low I would be willing to set up some RUT calendars, but that make no sense right now.
Still working the last lonely RUT butterfly, all in an attempt to reduce some of the loses of 670 and 680 fly. As you can see below the greeks for this position are still under control. In the (short term) dominant market trend I don't have any damage. Trend reversal will allow me to close the 680/720 debit spread and still have a small profit.
Since we all expect a down turn one of these days, I bought some TWM and bought and OCT ATM puts. If the down turn does not come. I will lose the put premium, but not the principal. If the down turn comes, the put premium was a small price to pay. Just a little bet on another leg down in the bear market (before OCT).
Not much to report; sideways day. I still read the 727 in the RUT futures as a intermediate top. But maybe there is some positional bias in that analyzes.
Here is the graph of the replacement butterfly.
And that's it for the week. My wife is taking me to away from the home and office for a little weekend getaway. Boston is the destination. First time, never been, looking forward to it.
Enjoy your weekend
Successful Option Trader (for own account); interested in associating with a professional group of traders, trading for a fund or OPM.
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