Why risking only 1/3 of your account makes sense for this trading style

The trades I am using should work over 90% of the time, possibly 95%. At current volatility, they return around 15% on margin. The Kelly Criterion says we should risk 23.3 to 61.1 percent of an account with this sort of return ...

But the plan involves 2-4 trades on simultaneously, possibly a few more during earnings season.

And all of these should be fairly closely correlated, meaning that in rare circumstances all could lose simultaneously even using the very wide .10 delta mentioned in the last post.

But some events swamp even the .10 delta:

Including certain mistakes that one can imagine being made by this guy:

Or this guy:

Or even certain scheduled events like elections that one can see coming:

Now, one can stay out of the market during U.S. elections and I will probably do that. But for the other unforseeable events, it makes sense to limit exposure to the market to an amount that won't kill us to lose it.  And with the short duration trades we are using, there's not much chance of rolling or adjusting and I'm just not interested in doing that sort of trading anyway.

Since these sort of events are so rare, it's very likely that we'll be way ahead (600% or more, I hope!) before taking this max loss ...

This is a lesson I learned the hard way from earlier in my career.

Update: the .10 delta is just the ticket

A condor (or strangle) at the .10 delta for the short strikes is wiiiiiiide ...

This week was extraordinarily volatile, but still the .10 delta SPX trades (even one that I made at .12 delta) were barely tested. Not only that:

AMZN was down $100 on Wednesday after a Trump tweet claiming they didn't pay enough taxes. This whacked the 1 standard deviation condor I had on, but had I used the .10 delta even this would have expired worthless!

TSLA had similar troubles and results: a loss at 1 standard deviation but a win if put on at the .10 delta.

So here's my trading plan:

• continue using the 1 standard deviation condor with NDX a.m. settlement when it's available once per month; I put this on around 9:45 or 10am Pacific
• otherwise put on an SPX trade .10 delta condor every Monday, Wednesday and Friday, 4-5 DTE
• Supplement with high-IV underlyings like AMZN and TSLA and CMG ... all at .10 delta short strikes

That should do it ... more results next week ...

Maybe Karen the Supertrader was on to something: 1 Standard Dev isn't enough!

First, the AMZN trade that looked to be "risk 1 to make 1.41" turned out to be an end-of-day pricing anomaly that I didn't see this week. But I did put on a 6-day (since Good Friday is a market day off next week) 1 standard deviation Iron Condor on AMZN today anyway ...

I have been watching TastyTrade for several years ... you can just search YouTube for their conversations with "Karen the Supertrader."

One of her key strategies is going wider on credit spreads than 1 standard deviation. Based on what I've seen from my SPX trades over these first several, that's just what I need to do. I barely lost the one ending earlier today; the 1 standard deviation short strike was at 2590 ... but SPX closed at 2588.26. Not a total loss (since the spread was 5 dollars wide, but just a small L in the record.)

But clearly if I'd gone just 1 strike wider, this L becomes a W. And the VIX closed today at 24.78, making a spread with the short delta options at the .10 delta rather than .16 still return around 17% when held to expiration. And that should bring the win rate up to 90% at least; the Kelly Criterion run on those numbers suggests risking 31% of one's stake on such a trade.

I'm going into "production" next week with this .10 delta trade risking 10% of the accounts I'm running for the first 8 or 10 trades, then possibly move up to 1/2 Kelly after that ...

And as for SPX, so for AMZN and TSLA; I'm going to try them with .10 deltas too.

Here we go ....

NDX trade wins again! (14 for 15? I've lost track!) Also: AMZN?

This was "expiration week" meaning the NDX was once again a.m. settled. I put it on again, and again it worked ...

Volatility was still up a bit, so I got from $1.60 to $2.29 credit, which is 29.7% on the $2.29 credit.

I put on the SPX Friday to Monday trade again and so far so good. But its volatility is pretty low and watching TastyTrade I just got another idea ... AMZN.

Yes, Amazon.com ... it's priced high enough that one can go waaaay out to the wings and still get a reasonable credit. But if you take a not quite so way out upper wing (16 delta) and a 5 delta lower wing, look what you get (on a 1-week trade):

That's right: risk 1.05 to make 1.5 (if held to expiration). This should work at least 70 percent of the time, and putting this into our Kelly Criterion calculator gives:

Translation: a trade that works 70% of the time, returning 1.41125 of the amount at risk would be maximally profitable over time if you risk 48.7% of your account on this trade ... 24.3% for half kelly, which is plenty profitable and less volatile for my tastes.

Anyway, I'll have to try one of these next week ...

Midweek update: SPX Friday -> Monday trade worked OK: now 2 for 3

The market backed off its flirtation with 2800, fortunately, so the Iron Condor I put on Friday did just what it's supposed to do at the close earlier today: expire worthless.

I didn't put on a Monday -> Wednesday one as I'd intended as I was running around on house sale duty until 11am PDT by which time the credit was only enough to return 5% or so and I just decided the risk wasn't worth the reward.

So the next trade is going to be Thursday: the almost-always-works NDX a.m. settlement trade is available again this week, for the first time since February.

Friday I'll try the SPX trade again for Monday's expiration, and then 3 more next week (all one lots) and by that point we will be getting an idea of its win frequency ...

2nd SPX trade clobbered by jobs report

I put on another 1 standard deviation iron condor on SPX on Wednesday that was just on the edge of losing to the upside until the jobs report came out and the market Really Liked it:

That was my trade exploding; the market graph looked like this:

As you can see, the uptrend continued into the futures market for Sunday, which portends possible problems for the trade I have on as of Friday: another 1 standard deviation (actually a little less than that on the upside; I sold the 2800 call which I think was 17 or 18 delta) Iron Condor on SPX.

It turns out that one can do three of these per week; they expire Monday, Wednesday and Friday ... if they really win 80% or more of the time and return enough per trade, that could be fabulous. And it wouldn't be too unusual for a trade winning 80 or 82% of the time to lose 2 in a row.

But we'll know within a couple of weeks if we're getting close to the 80% number. I'm going to run these every MWF for at least that couple of weeks (just 1 lots until I know) to see how it works.

The fabulous NDX a.m. settled trade is coming up Thursday as well; I'll be looking forward to that!

More next week ...

SPX trade: a little too exciting but it won!

I didn't get a backtest done on SPX, but since "fear is overpriced" I assumed that a 1 standard-deviation (68%) iron condor should win 88% of the time or thereabouts. And volatility was high enough that the return on risk on Wednesday for the options that expired Friday was around 20%.

This made the Kelly Criterion amount of suggested risk around 28% of the account; I used 20% of the $10000 in this particular account.

I sold the 2680 put and the 2785 call (and bought wings to limit the risk).

Then this happened:

I'm going to raise interest rates until my hands bleed!

 And this happened:

Let's put tariffs on steel and aluminum! Surprise!

Which led to this:

The market hit its trough at around 2650 early Friday before recovering sharply to close right in the sweet spot: 2691.

This is another example of the value of letting things play out. If you limit risk on the way in and just go with it, sometimes the right thing happens ... and boy, would I have been second-guessing myself if I'd tried to get out of this early (for a loss).

I don't get to do the fabulous NDX trade until next week so I'll try another one of these next week.