Rolling clarified further: delays profits until the next expiration then wahoo!

A much better week this week! Since AMZN's volatility was so washed out after last week, I tried TSLA this week and had a similar experience:

Part of the boost was Elon Musk buying $25 million worth of TSLA stock this week ...

But selling the 8 delta call was way up at 365, so enough room that I didn't have to roll out to the next week (though I was watching carefully) but all 4 legs expired worthless as desired.

Even better, the narrow winged SPX trade I rolled over Monday (unnecessarily, it turned out, as the market closed just below my 2785 short call) came in fully for Wednesday along with the other trade I had on (short 2805 call: plenty of room) ....

And this was "expiration week" (for monthly options) so I also put on the Fabulous NDX trade, which won again and returned about 11% on a wide-winged 1 standard deviation iron condor ...

And the way I'm thinking about the effect of rolling ... based on this week it seems like compressing a profit spring:

And letting it burst out the next week ... one account I'm trading went from $34400 to $40900 this past week ... though this includes about $900 in scalping profits.

Probably another TSLA 4-day trade going on tomorrow a.m. and I'll report again next week!

A tough week ... Sosnoff proved right again and rolling clarified

I tried Amazon for the Monday-Friday trade, and by Wednesday it looked dead:

But I was short the 1697.5 calls, and it settled back between 1683 (where it closed on Friday) and 1690 after Thursday. So it paid off for full profit.

SPX wasn't so good:

It went straight up 40 points ... pulling back a little on Thursday before bouncing back up to the top on Friday.

I'm short the 2785 calls for Monday expiration, so right now it looks a little too exciting ...

As for the question I had last week about rolling: Tom Sosnoff recommended in email that I stick with wider strikes, but I thought I could narrow the strikes if I intended to roll losing trades.

Wrong! It's much easier to roll for a credit with wider strikes, and much easier to get further away from the money on the roll.

I'm actually wondering about the value of rolling at all with wide strikes ... Shouldn't I just take the (small) losses and move on? I can still roll anything that looks like it's going to lose big, and will have to roll anything that isn't cash-settled (as AMZN this past week was looking to lose I got a bunch of emails from Tastyworks saying they might have to take action to close the trade ... I assured them I was watching! and it worked out anyway ...)

But let's look at the profitability of the SPX trade without rolling (and with 30-wide wings) ... currently it's something like 20 wins, 4 losses: 83.33% ... and the wins average probably 6% of the amount risked, losses average maybe 25% ... Monte carlo results with these parameters & risking 20% of the account on each trade ... is not good enough (mean up not quite 100% over about 3 years) ...

But: (1) volatility is back to the bottom so I should be making more than 6% when it returns and (2) I've only been running this system for several weeks and still easily could be better than 90% win and (3) there are some other trades that are part of the deal, notably the Fabulous Almost Always works NDX a.m. settled one, coming up again this coming week ...

And finally: I tried scalping /ES futures for the first time starting Friday, and so far so good ... up several hundred dollars on a 1-lot of several little scalps.

Tomorrow I'm going to try the Amazon trade again ... fingers crossed!

Another 100% winning week ... profit of over 3.9% on the biggest account I'm trading

It was a zig-zag week that stayed enough in a range to pay off without anything extra required:

I was thinking after Tuesday I needed to be ready to roll on Wednesday, but no such problem ... then after the "trade war restart" late Thursday I was expecting a sharply down day ... but instead I guess the jobs report was too thrilling ...

Anyway, it's June 1 and I'm going to make a couple of small changes to the system for this month:

• I'm going to take a little more risk, around 20% of the account on each trade. This means that there will be 40% of the account in play most of the time, and 60% in the few hours of Monday, Wednesday and Friday when all 3 trades are active at once.
• I'm going to mix in some relatively more volatile individual stocks for the Monday to Friday trades, starting with Amazon this coming Monday. I'll also look at TSLA, CMG and a few others.

And the other change I started on in May that I'm absolutely going to keep: I'm going to be absolutely ready to roll any trade that seems to need it near expiration on Monday, Wednesday and Friday.

(A question that then occurs: if one is ready to roll any potentially losing trade, why widen the strikes?)

And I'm going to experiment with a big change in my own account; my agreement with others keeps me from doing this for them. I'm going to try selling strangles (i.e. a naked call and a naked put) on some earnings announcements.

I was looking at Costco, which had earnings this past week ... I actually tried to get on an Iron Condor trade just before the close but couldn't get filled. But just for kicks I tried looking at the strangle later ...

Costco's price is around $200, and I didn't realize that the margining for naked options was so small ... around $3000. The credit for a relatively wide strangle was $5.63 (i.e. $563), which amounted to 13.5% if held to expiration (and probably 10% if you took it off at first crack of the market the next day).  And in fact this would have paid off, as Costco went nowhere after the announcement.

I'll pick my spot on these, but this should make a nice extra boost in returns and doesn't seem superbly risky for a 1-lot ...

More next week ....

A quiet, 100% profitable week! Also: short-term monte carlo simulation and "the paycheck effect"

The trading plan I'm using depends on the market staying within about an 80 point range for 4-5 days, and this week the range was about 1/2 that:

So the 3 trades I had on that expired Monday, Wednesday and Friday all expired worthless and returned full profit (about 6% average per trade.) Accounts I'm trading were up about 3% for the week (down from 4% earlier, when volatility was higher).

I've been doing monte carlo simulations for a while now and have published a few results to this blog. But all have been at least several months long ... Here's a result for 6 weeks (18 trades of SPX + 1 NDX) running the plan like this:

• risking 20% on every trade, so totalling 60% for the few hours Monday, Wednesday and Friday when 3 trades are active simultaneously
• Assuming 5.8% won on every winning trade
• Assuming a 97.5% win rate ... achievable by rolling, I think

Results are like this (starting with $50000):

    min: 32435.031 

    mean:  59566.426 

    max: 61535.93 

    stddev: 3665.9998 

So not much different from the "3% per week compounded value":  $59702.61 ...

We'll check the results in 6 weeks!

Finally, I've been listening to this podcast:

I just finished #137 with Dr. William Ziemba on betting horse races and exploiting anomalies in financial markets. The discussion was wide-ranging, but one part of the discussion struck me. Ziemba says that his research indicates that volatility (although he doesn't use that word) is skewed toward the beginning of the month because some people put part of their paycheck into the stock market!

June 1 will be coming up shortly so I'll be watching for this ... Ziemba also writes on crashes:

He points out that crashes are rare; there have only been 3 10%+ moves in the modern era ... which is one of the reasons I feel confident risking 20% on every trade starting June 1.

More next week ...

Back on track and considering the value of rolling

I lost my 3rd trade in a row on Monday's expiration (details below), but since then:

• 2 SPX expirations, both winners
• the Fabulous NDX a.m. settlement trade was also available this week, winning again

About that third loss in a row: the short SPX strike for Monday the 14th was at 2720 ... the futures market was up all night and the market came back during the day, but not enough. It closed at 2730.13, a 30% or so loser (since the wings were $30 wide; I was long the 2750 call).

But the next day the market was down into the right range, closing at 2711, and only up to 2722 on Wednesday the 16th. So if I had rolled the call wing out and up to short 2730 and long 2760 for Wednesday expiration (for an extra small credit), that would have worked. Alternatively, I could have rolled laterally (sticking with 2720/2750 strikes) out to Wednesday (larger credit) and rolled again to Friday when that showed problems for Wednesday. Friday close was back to 2712, so that also would have worked for full profit.

I hope not to have to put this into practice for the rest of the month ... there are only 5 more expirations in may and I'd just as soon have them all expire worthless without rolling.

But I'm comfortable taking more risk with the rolling strategy on the call side; if the "meteor strike" comes while this extra trade is on, all it does is reduce the overall loss. The "put wing" will already have expired worthless, so an extra one of these rolling for profitability is OK.

Another change I'm considering for next month: substituting certain relatively volatile underlyings (AMZN, TSLA, etc.) for the Monday->Friday trade. This should make a bit more money than doing the trade on SPX at its currently depressed volatility.

The rolling ability for this kind of back-and-forth market is metaphorically a protection for our new growth:

More next week!

Winning streak comes to an end, but changes to plan show their worth

Here's what happened to the winning streak this week:

Once again, the idea is that the trade pays off if it stays within a wide range for 4 or 5 days. But not this past week:

However, the last 2 changes I made to the plan paid off handsomely. First, "widening the strikes" ...

The short strike for Wednesday was at 2685, but the close was at 2697.79. That would have been a total loss for a 5-wide wing, but since the wings in this case were 30 wide, it was only a 37% loss.

Friday was similarly illustrative. I was short the 2725 call and was watching toward 1pm PDT for the closing price as it was just dancing around 2725. There was one final blip to 2724.whatever, where the whole trade would have finished worthless as desired (thereby letting us keep the full credit). But in the final few minutes is blipped up to close at 2727.72.

Since we got $2.35 for this one were only $2.72 inside the short strike, that's only 37 cents ... of a possible $27.65 loss: 1.34% of what it could have been.

And the other change, moving to the .08 delta: whew. If I'd stayed with the .10 delta for the call side, I've been clobbered on both of these.

All that being said: the Monday expiration is in danger of losing also, its short strike being at 2720. So I need a down day on Monday to get that back in the black.

I'm going to stick with this setup through May despite this episode, but two adjustments that I may want to do in June:

• Go even further out on the call side: .06 delta?
• Watch for the same short strike stacking up (like 2725 today and 2720 Monday) and adjust the later one out 20 points just in that case?

I hope that this week will prove wildly anomalous and we'll go back to 10 or 20 winners in a row ...

We'll see! More next week ...

A little too exciting in spots, but still 100% wins ... Also Kelly Criterion vs Monte Carlo

On Thursday a.m. early I thought the winning streak might come to an end:

But as you can see, the early morning a.m. plummet created a bounce up into the profitable zone ... I was short the 2610 strikes for Friday and it never got close again.

I am keeping track of the return I'm getting on this page, but I've been thinking about the limitations of the Kelly Criterion to use in evaluating trades.

The Kelly Criterion assumes that when you lose, you lose 100%. This is OK for some trades where this is in fact the case, or nearly so. But my widen the strikes revelation from 2 weeks ago made me realize that with this kind of trading there will be a spread of losses as wide as the wing width. Until I have a loss with this system (no hurry!) I don't even have a dot to put on that map.

But with a Monte Carlo simulation one can write a computer program to use the data that one has for this kind of loss, or just to program various kinds of reasonably expected loss instances.

I have been maintaining such a program for a while now; it runs 20000 simulations of a trade with various parameters (win rate & amount one up until recently) ... and now with a function I added failcalc() to estimate the spread of losses. Source code:

def failcalc():

    # 80% chance of getting the "notsobaddest" 20% of the spread

    spreadone = random.random()

    spreadtwo = random.random()

    if spreadone >= 0.8:

        loss = (1.0 - spreadone) * spreadtwo

    else:

        loss = spreadtwo

    return loss

That is, I assume that losses will be clustered 80% in the 20% smallest loss end of the spread's wing.

Other assumptions: 95% win rate, making 9.31% on every win, risking 15% of the account on every trade, 3 trades per week. Run is from now to the end of 2020.

The simulation using these assumptions gives this result, starting with $50000 today:

Minimum: $405740.16

Mean (average): $3,565,303.20

Maximum: $13,469,500.00

Standard Deviation: $1,584,992.10

Standard deviation is based on this curve:

The Standard Deviation symbol is the greek letter sigma ... basically the standard deviation shows the 68.2% chance of being that amount above or below the mean. So the most likely result (assuming the simulation parameters are correct!) is (roughly) between $2.0M and $5.0M ... 

Let's change the parameters back to a 5-wide wing. This would give a higher return (let's assume 13.5%) but much more likely to give a 100% loss (assume 80% of the time you have a 100% loss, with the rest randomly spread along the [tiny] width of the wing).

Results of this run:

Minimum: $144644.16

Mean (average): $9165858.0

Maximum: $109293100.0

Standard Deviation: $7361821.0

Clearly this one is much more volatile ... and subject to being much more likely to lose 2 in a row (which is not captured in the assumptions, I don't think.)

One think the Kelly Criterion can do is point us to the amount of risk we should be taking on every trade. Currently the Kelly is suggesting we risk 41.2% for the trades we have on our page ... 

Going back to the original run (wide wings, spread of losses wide again), but risking 20% on each trade, gives us:

Minimum: $897,867.06

Mean (average): $14,407,274.00

Maximum: $66,243,100.00

Standard Deviation: $8,207,564.00

So with this one I'm most likely to wind up with $6M to ... $22M ... anything in that range would be OK, really!

I'll be sorely tempted to start this in June, but I am going to stick with 15% risk per trade in May as previously I said ...

What will I do if there's no flaw in my analysis and I do wind up with $10M or so by the end of 2020? This, for sure:

... build a zero-energy house that my Lovely Wife will find acceptable ...