The other leg of the trading plan: /ES futures and "reducing basis"

A neutral trade like the one I've been using of the basis of the strategy I'm evaluating is vulnerable to events such as:

That cause market reactions like:

To protect against this sort of thing there are some things one can do. My favorite is to sell short S&P futures contracts and then sell puts against those short contracts.

The characteristics are like this: S&P "e-mini" futures contracts (symbol /ES) move $50 per point, or $12.50 per 25 cent "tick" ... I sold 1 contract today at 2383.25, then one put for "7.25" ... times $50 = $362.50 in credit I received for selling that put.

When the market goes down sharply, this trade pays off nicely and cushions some of the (assumed) losses one would get on the neutral trade in a sharp down move.

Additionally, selling one put against the short /ES contract lets one be "right" and make a profit even when nothing happens or the market goes just a bit up! Even if it goes sharply up, it eventually stops and this trade catches up to any losses with the sale of puts.

Effectively each put sale "reduces the basis" of the trade price, in this example, giving 7.25 more points before we start to lose. It's as if we sold at 2390.50!

This gives an extra chart sitting next to the standard chart we've been using:

Trade Date	What	Qty	Credit Received	Net Liq Change
04/25/2017	/ES Put	-1	$362.50	$0

I'll update the 'Net Liq Change' once a week; the number changes continually.

The standard chart now looks like this:

Trade Date	Symbol	Result	Profit/Loss	Comment
02/06/2017	SPY	Lost	-18%
02/13/2017	SPY	Lost	-16%
02/21/2017	SPY	Won	+15.4%
02/27/2017	SPY	Won	+17%
03/06/2017	SPY	Won	+15.3%
03/13/2017	SPY	Won	+12.9%
03/20/2017	TLT	Lost	-1.4%	Dumb!
03/27/2017	SPY	Won	+9.6%
04/03/2017	SPY	Won	+6.6%	18 days long
04/10/2017	SPY	Open	+11.1%	only 14 days!
04/17/2017	SPY	Open
04/25/2017	SPY	Open

Volatility collapsed after French election yielding another win

Sunday was the French election, which the markets liked. The S&P futures market was up sharply starting yesterday on the news that Marine Le Pen is probably not going to win.

Instead, this guy, Macron, is in first place and almost every other party in France has pledged to support him to beat Le Pen.

He's a former finance guy who won't blow up the EU. So the market is happy.

How this affected the trade I'm doing: it's a credit spread that benefits by lowered volatility. The volatility crashed this morning, letting me get out of the April 10 trade for an 11.1% gain. The chart now:

Trade Date	Symbol	Result	Profit/Loss	Comment
02/06/2017	SPY	Lost	-18%
02/13/2017	SPY	Lost	-16%
02/21/2017	SPY	Won	+15.4%
02/27/2017	SPY	Won	+17%
03/06/2017	SPY	Won	+15.3%
03/13/2017	SPY	Won	+12.9%
03/20/2017	TLT	Lost	-1.4%	Dumb!
03/27/2017	SPY	Won	+9.6%
04/03/2017	SPY	Won	+6.6%	18 days long
04/10/2017	SPY	Open	+11.1%	only 14 days!
04/17/2017	SPY	Open

That's back up to 70% winners; 80% if you don't count the small dumb loss from 3/20.

Ordinarily I would have put on another trade this morning, but I am waiting until tomorrow to see if we can get a little higher volatility going.

Advice to those considering trading

Interest rates continue to be extremely low, making the standard retirement scenario a problem:

Even if you have $1 million, the risk free rate of return is about 2%. So you'd get ... $20,000 per year.

So if you have less: $200000 or $300000, what then? Keep working until you die?

Not necessarily; there are ways that can produce a much higher return ... at the expense of taking more risk. So the first question to answer for yourself is: Am I willing to take more risk?

The one-question risk tolerance test: Are you willing to eat at Chipotle?

After Chipotle's "little problem" some people refused to go back there. What about you?

If you pass that test, you have to choose someplace to start. I posted elsewhere a list of resources for beginning traders, so you can start with that.

If you're just going to do one thing to start, watch Confirm and Send on Tastytrade for 90 days. That should give you an overview of their research. Then Google around for anything you don't understand.

One caveat about Sosnoff and Tastytrade: despite their "trade small, trade often" mantra there are other ways to make a profit. Sosnoff is sometimes wrong, but never in doubt!

Another winner!

Cashed out the April 3 trade just now for a profit ...

This one wasn't quite as profitable as some others, but i also didn't hold it as long: only 18 days.

I'm moving toward a 25-day trade time: sell at 46 DTE, buy back around 21 DTE. This avoids some of the risk of the days toward expiration but captures a lot of the collapse in option value starting around day 45.

Chart is now like this:

Trade Date	Symbol	Result	Profit/Loss	Comment
02/06/2017	SPY	Lost	-18%
02/13/2017	SPY	Lost	-16%
02/21/2017	SPY	Won	+15.4%
02/27/2017	SPY	Won	+17%
03/06/2017	SPY	Won	+15.3%
03/13/2017	SPY	Won	+12.9%
03/20/2017	TLT	Lost	-1.4%	Dumb!
03/27/2017	SPY	Won	+9.6%
04/03/2017	SPY	Won	+6.6%	18 days long
04/10/2017	SPY	Open
04/17/2017	SPY	Open

That's up to 67% winners, including the dumb loss a couple of weeks ago. This rate should become 80%+ in the next few weeks ...

Back on track: up 9.6% for the trade closed this a.m.

I made the right decision taking a small loss on the TLT trade I took off last week, as in fact it zoomed up to the point I would have lost 15% instead of the small loss I did have to take.

But back to the current one:

Here's the results chart as of this morning:

Trade Date	Symbol	Result	Profit/Loss	Comment
02/06/2017	SPY	Lost	-18%
02/13/2017	SPY	Lost	-16%
02/21/2017	SPY	Won	+15.4%
02/27/2017	SPY	Won	+17%
03/06/2017	SPY	Won	+15.3%
03/13/2017	SPY	Won	+12.9%
03/20/2017	TLT	Lost	-1.4%	Dumb!
03/27/2017	SPY	Open	+9.6%
04/03/2017	SPY	Open
04/10/2017	SPY	Open
04/17/2017	SPY	Open

Dumb mistake yields small loss

I took the March 20 trade off today for a small loss: 1.4%. I missed the chance yesterday to get it off for a small profit.

The dumb mistake I made was to use TLT, an ETF for the bond market, when I had been using SPY that tracks the S&P 500.

The problems are twofold:

(1) the risk graph is skewed with more space to be profitable on the downside than on the upside:

(2) Bonds are inversely correlated with stocks:

(3) And stocks are right near record highs ... and bonds are relatively very low. So a small move down in stocks and up in bonds (seemed very likely to me), and this trade loses.

I had a chance to get out yesterday briefly for a tiny profit but missed it, so the chart now looks like this (with two columns added to give the symbol and a comment)

Trade Date	Symbol	Result	Profit/Loss	Comment
02/06/2017	SPY	Lost	-18%	Trump rally
02/13/2017	SPY	Lost	-16%	Trump rally
02/21/2017	SPY	Won	+15.4%
02/27/2017	SPY	Won	+17%
03/06/2017	SPY	Won	+15.3%
03/13/2017	SPY	Won	+12.9%
03/20/2017	TLT	Lost	-1.4%	Dumb!
03/27/2017	SPY	Open
04/03/2017	SPY	Open

Glad to have gotten that mistake out of my system while testing small ...