Entry 8 July 23: Winning by Following Rules

By: nic

In the past two weeks, I have been winning after stricter following the rules I set up for myself.

With tastylive’s lookback engine I backtested at different time periods (all-time, 6 years, YTD) my list of highly liquid, narrow bid-ask spread underlyings from different sectors (now over 20): AAPL, AMZN, BABA, BAC, C, CSCO, DIA, DIS, EEM, EWZ, GLD, GOOGL, IWM, KRE, MRK, MRVL, MSFT, QQQ, SBUX, SLV, SPY, TLT, TSLA, UBER. Over time I want to reduce this to under 20.

I also created and backtested a list of low-value underlyings (<=$30) which I intend to use for undefined risk plays (short put mainly): AAL, CLF, ET, F, NIO, PLTR, PTON, RIOT, SNAP, SOFI, T, UVXY. Also to be reduced to under 10.

I prefer delta-neutral trading and am using tastytrade’s beta-weighting deltas indicator to benchmark individual positions and sum them to understand the directional exposure of my whole portfolio.

I now have a positive portfolio delta beta and my portfolio is earning me $7 per day (theta). Negative vega means that the value of my option portfolio decreases when volatility increases, and it increases when volatility decreases. So I have to keep a close watch on the VIX (still very low).

How am I Doing Overall?

However, I am not progressing the way I would like. I seem stuck in a ‘twilight zone’ around $11.000, which is somewhat below my in-lay. So my trading discipline/style today is leading to a slightly positive picture (given that it compensates for the commissions and fees I have to pay) but is far from the financial goals I set. I should by now have been comfortably going towards $13.000.

I still make many mistakes, and my trading discipline has improved, but it needs further work.

I am now at a $ 1202.33 realized gain (up over $200 since two weeks ago) and a $1283.33 P/L YTD, so I have a -$81 unrealized gain. Considering commissions and fees, I am now at $760.82 YTD. So Still far away from the goals in my financial plan, which I may need to revisit. To reach my goal of adding $7000 this year, I would need $100.000 to trade with (9 times more than what I have now put into the game)!

What am I Reading?

And I started reading another ‘must-read-for-options-traders’ book that will further help me in learning options trading: Options, Futures, and Other Derivatives, Global Edition by John Hull 

I am also now programming my trades in Python.

Climbing rocks
Still a long way to go

Table of Contents

Last Week’s Options Trading

The VIX is slighly up and on average was around 15 this week, so I need to continue adjusting my trading. It means fewer short premium strategies. I follow as much as possible the tastytrade rules (not more than 25% of my money into short premium strategies.

I only have 8 open positions end of the week, using around 30% of Buying Power. I still don’t feel comfortable about where the market is going.

Options Strategy Risk Management Rules​

  1. In high volatility (VIX >20), sell high vol (IVR>30) options to collect premium income while spreading the risk over various expiration dates (staggering dates to avoid expiration density); the higher the volatility, the more of your account you can allocate to short premium strategies.
  2. Sell options at high IVR (>30)  to extract high (overpriced) premiums (‘overpriced’, since predicted volatility is nearly always overestimated, and stocks are less volatile than predicted, so implied volatility implosion or IV reversion to the mean allows for profits to be taken early when stocks fail to be as volatile as predicted). ​
  3. In low volatility (VIX < 20), buy low vol (IVR <30) debit options (you pay the premium) and lower the total allocation; the less volatility, the less money you should allocate to options trading. New rule: only sparingly enter into debit spreads (especially bear puts!), and only do this when more than three signals (technical indicators) confirm this.
  4. Sell and buy options on liquid underlyings in the options market (to open and close positions easily and ensure trades can be filled with narrow bid-to-ask spreads for optimal option pricing ​).
  5. Sell and buy options across tickers with broad sector diversity across uncorrelated sectors to spread risk (too much concentration into any given sector runs the risk of stocks auto-correlating in the same direction and potentially jeopardizing all trades within the sector-specific bucket of trades).
  6. As much as possible (given a small account) stick to risk-defined trades (put spreads, call spreads, and iron condors) to mitigate risk and reduce the amount of capital required for any given trade.
  7. Probability of success (P50 in Tastyworks platform)> 70% to ensure a statistical edge
  8. Close the trade if 50% – 75% loss
  9. Close the trade and realize profits at 50% -75% premium early in the option lifecycle (21 DTE)
  10. Close-out trades (ideally 14-21 DTE) before expiration (before strike price gets challenged just before expiration (high volatility and higher loss probability!).
  11. Re-invest the capital made free towards additional trades.
  12. Maximize the number of trades to allow the expected probabilities to play out (trade small, trade often).
  13. Size position/portfolio allocation to manage risk exposure (worst-case scenarios always need to be considered therefore, I conservatively use small allocations to options trades, so only max 4% of my portfolio should only be used for any given trade). 
  14. Keep an adequate amount of cash on hand (~40% in my case) to protect your portfolio against any major market downturns (i.e., Covid-19 and Q1 2022, 2023 recession(?). Cash also allows me to buy stocks/long equity at heavily discounted valuations. ​

Alternatives for Short Premium Strategies

I prefer short premium strategies so high volatility. But volatility is still relatively low. I need to be able to enter trades in all market conditions.

Historically, implied volatility has outperformed realized implied volatility in the markets. For this reason, we always sell implied volatility to give us a statistical edge in the markets. While I often search for a high IV rank at order entry, the market does not always accommodate me.

I, therefore, will start looking at adding these options strategies that benefit from increases in volatility, as well as more directional strategies to use during low-volatility markets to my playbook:

  1. Long bull call and (sparingly) bear put vertical spreads
  2. Ratio spreads
  3. Long put calendars and call calendars
  4. Long diagonal spreads
  5. Long volatility products

In bull(-ish) markets, implied volatility tends to be low in equities as the VIX drops. Just like I take advantage of reversion to the mean when IV is high, I stay engaged and do the same when it gets to an extreme on the low end. Therefore, in low IV, I will use strategies that benefit from this volatility extreme, expanding to a more normal value.

This doesn’t mean, however, that, in low IV markets, I stop looking for underlyings that have high IV. Premium selling is where the majority of the statistical edge lies.

Opened Positions

Opened SOFI Aug 18 Short Put on 7 July for $30 credit

8 July 2023: slightly in the red.

Opened GLD Aug 18 Bull Call 178/182 for $190 debit

8 July 2023: Aug 18 Bull Call; now slightly in the red.

Opened MRK Aug 18 Bull Put 110/105 on 7 Jul for $185 credit

8 July 2023: in the green with $5

Opened MSFT Aug 18 310/315/370/375 Iron Condor on 5 Jul for $152 credit

8 July 2023: At $34 P/L Open now.

Opened: RIOT Jul 21 12 Long Put on 7 Jul for $20 debit

8 July 2023: This really is a bet that RIOT will come down after its massive rise in gthe past days. Friday already looked promising. $ 7 in the red now.

Closed: Opened: RIOT Jul 21 12 Short Put on 5 Jul for $57 credit, closed 2 days later at $23 debit

7 July 2023: closed for $34 profit (60%)

Closed: opened NKE Earnings Play Jun 30 103/107/120/124 Iron Condor on Jun 29 for $137 and closed the next day for $8 debit

30 June 2023: closed for $129 profit = close to 95%!

Opened MSFT Jul 21 317.5/322.5/350/355 Iron Condor on 27 Jun, rolled calls out to Jul 28 on 3 Jul and puts out to Jul 26 and up to 320/325, rolled calls out to Aug 18 on 7 Jul

8 July 2023: Due to all rolling, and despite attempts to roll alos the put wing to Aug 18, I now have two spreads at different dates. Overall still in the green ($6)

Closed, opened RIOT Jul 21 9.5 Short Put on 21 Jun, rolled out to Aug 18 and up on 25 June and closed on 3 July

3 July 2023: closed at $70 profit

Running and Closed Positions

Closed: Opened on 2 June: Jul21 PLTR 11/13/18/20 Iron Condor for $67 credit, closed 11/13/20 on 23 Jun and the 18 on 26 June

28 June 23: see below: still $80 profit even if this play was a huge mess.

26 June 23: closed the 18 naked position

25 June 23: watch it: I messed this up (on mobile) and and now left with two naked positions!

Closed: Opened on 21 June: Jun 30/Jul 28 PLTR 14 Calendar Put for $45 debit closed the Jul 28 long leg by accident on Jul 28 and closed all on 28 June

28 June 23: Part of the mess up above: I closed the 14 Jul 28 short put with 3 of the iron condor legs. It still made me $80.

Closed: Opened on 21 June: Jul 28 DIA 343/338 Bear Put for $190 debit

26 June 23: after 5 days closed for a $75 profit

Closed: Opened on 29 June: TSLA Aug 4 Iron Condor for $177 credit and closed 5 July for $80 debit

5 July 2023: closed for $97 profit.

Closed: Opened on 20 June: Aug 18 DIA 342/337 Bear Put for $180 debit and closed for $189 credit on 7 Jul

7 July 2023: slight profit but not worth the wait

Closed: Opened on 13 June: PTON 8 Jul 28 Short Put for $42 credit rolled to 7 Sep 15 for $14 debit and closed on 6 Jul for $85 debit

6 July 2023: another losing play I had to close at over 100% loss. Badly managed

Closed: Opened on 8 June: PYPL Jul 21/Aug 18 62.5/67.5 diagonal for $385 debit, rolled twice and closed on 3 July.

Date

25/6/23

Underlying

66.94

PoP/P50

355

DTE

26

IVR

3.2

Δ Delta

-29.11

Θ Theta

-0.470

Other

Date

10/6/23

Underlying

63.49

PoP/P50

51%

DTE

41

IVR

8.6

Δ Delta

-21.23

Θ Theta

0.411

Other

Date

8/6/23

Underlying

64.48

PoP/P50

DTE

IVR

Δ Delta

Θ Theta

Other

3 July 2023: went bad so I closed it at $89 loss.

10 June 2023: at 7.3% profit = $28; I need to understand better the nuts and bolts of a diaginal spread. This is what AI has to say about it (here I actually found out I placed the strike prices wrong – the short-term put should have been at a higher strike price compared to the longer-term long put):

The profit potential of a diagonal put spread will be affected by changes in the underlying asset’s price, but the extent of the impact will depend on the specifics of the trade, such as the strike prices of the put options and the time to expiration.

A diagonal put spread involves buying a long-term put option with a lower strike price and selling a short-term put option with a higher strike price. The idea behind this strategy is to profit from a moderate decrease in the underlying asset’s price, while also limiting your potential losses.

If the underlying asset’s price decreases considerably below the strike price of the long-term put option, the profit potential of the diagonal put spread will be limited. This is because the gain on the long-term put option will be partially offset by the loss on the short-term put option. At some point, the loss on the short-term put option may completely offset the gain on the long-term put option, resulting in a maximum profit for the diagonal put spread. Beyond this point, any further decrease in the underlying asset’s price will not result in additional profits for the position.

On the other hand, if the underlying asset’s price increases considerably above the strike price of the short-term put option, the profit potential of the diagonal put spread will also be limited. This is because the loss on the short-term put option will be partially offset by the gain on the long-term put option. At some point, the gain on the long-term put option may completely offset the loss on the short-term put option, resulting in a maximum profit for the diagonal put spread. Beyond this point, any further increase in the underlying asset’s price will not result in additional profits for the position.

In general, the profit potential of a diagonal put spread will be highest when the underlying asset’s price is near the strike price of the short-term put option at expiration. If the underlying asset’s price moves too far away from this strike price, the profit potential of the position will be limited.

Sage

So what is AI telling me about the (wrong) set-up I chose:

If you sell a short-term put option at a lower strike price than the long-term put option you buy, you would be creating a position that is the opposite of a conventional diagonal put spread. This configuration would create a bullish position that profits from an increase in the price of the underlying asset, while potentially limiting your losses if the price were to decline.

However, this configuration would also carry additional risks and potential losses that are not present in a conventional diagonal put spread. If the price of the underlying asset were to decline significantly, the long-term put option you purchased may not provide enough protection to offset the losses on the short-term put option you sold, resulting in a net loss for the position.

So I have to be careful here. If the price goes down I must close immediately!

Closed: Rolled Opened on 26 May: AMD Jul 21 Iron Condor 100/105/140/145 for $180 debit; rolled put wing on 14 Jun to 110/115 for $65 credit and call wing on 20 Jun to 125/130 for $90 credit and closed on 26 June for $330

Date

25/6/23

Underlying

110.01

PoP/P50

31%

DTE

26

IVR

21.6

Δ Delta

9.86

Θ Theta

0.750

Other

Date

10/6/23

Underlying

124.92

PoP/P50

62%

DTE

41

IVR

45.4

Δ Delta

-1.02

Θ Theta

2.133

Other

Date

3/6/23

Underlying

117.86

PoP/P50

64%

DTE

47

IVR

26.9

Δ Delta

3.01

Θ Theta

1.921

Other

26 June 23: closed for $5 profit which hardly covers commissions and fees paid. Took too long to go in the right direction and then did the opposite.

10 June 23: still at $30 profit (16.7%)

3 June 23 : $30 profit

End-of-Week Active Positions Overview

Financials

Cash Balance JUly 2023

P/L YTD now at 1284.33. Low volatility does make me more money if I stick to the entry and exit rules!

I am automating the P&L overviews so as soon as I am ready I will here show the results. The overview here below stops at 3 June 2024.

Status 13 May 23 (not updated anymore – anyway not chnaged very much)

Due to the low volatility and not being able to find enough plays, my trading is suboptimal, I am not making full use of my cash, optimizing my positions enough, etc . and I am still making mistakes in choosing the right directions and the right options strategies. Still looking for the edge!

The points I have to look at are:

  • My positions are generally placed on the safe side with low deltas, risk, and profit. I am already increasing risk by widening spreads and picking higher deltas.
  • For a better-balanced portfolio allocation (based on VIX), I am adding non-short premium and passive income strategies to optimize my portfolio.
  • Except for a small short put undefined risk play in RIOT, I have been only doing a limited number of defined risk strategies which are lower risk but also less profitable: I may need to start looking at adding other defined risk strategies, and once in a while short straddles and strangles based on low prices underlyings. But my account is, at this stage, really too small for this.
  • I now select positions with higher premiums than the commissions and fees I have to pay and the target profit I have set as a rule (50%).
  • I am now also monitoring the beat-weighted delta of my positions and total portfolio; in periods like this, I need to manage it so that it remains close to 0. I am far away from achieving this.
  • BUT MOST IMPORTANTLY: I SHALL ABIDE BY MY ENTRY, ADJUSTMENT, AND EXIT RULES!

Conclusion

To continue to work on: weekly reminder: I still need to get more mechanical and disciplined in entering and adjusting the positions and remembering why I (or the platform) close positions.

With each trade, I need to detail the time, make a screenshot of the market on the relevant timeframes, detail my reasoning for entering, the reason for stop placement, the reason for taking profit level, etc. So when, in a few months, I look over my trades, I begin to notice patterns in my losing trades and winning trades. Over time I can fine-tune your edge.

The same for exiting. The focus is now on learning Python and quant finance to further improve my options trading.

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