The solution: earnings Iron Butterflies!

I took the week off trading after my annoying loss last week ... I've been looking for something else to supplement the Fabulous NDX trade (see the last several posts on this subject) ...

I looked at trading earnings reports the way Sosnoff and company trade them: selling premium and assuming that the results of earnings will usually be inside the "expected move" as calculated by the implied volatility (which is calculated for you on Tastyworks and ThinkorSwim and no doubt other platforms), like this:

See near the upper right hand corner? MMM (3M corporation) is expected to move +/- $7.42 from its current price. How to profit from this?

I watched this video from Tastyworks, where a "rising star" talks about trading earnings ... He said use uses "mostly strangles" (i.e. short strangles, an undefined risk trade) ... he says "very conservative" ... around the 0.05 delta.  Looking at this:

This is very likely to pay off, but the risk/reward isn't good enough for me ... on this 1-lot trade you'd probably make $25 or $27 ... while risking "undefined" losses. Almost certainly not an issue with this one: put the $25 in your pocket and go on. But there are a a couple of crazily volatile ones  that give you a large loss. This guy Shervin says "I scratched that Nvidia trade." ... here's NVDA for the last two years:

Do you want to trade undefined risk trades on this one? I don't.

I find that the Iron Butterfly (Tastytrade calls it "Iron Fly" if you're looking on that site) is a much more attractive trade:

Getting 1/4 to 1/2 the credit is 10% to 20% profit on this one, and even the max loss is manageable.

I can do 10 or 12 per week of these during "earnings season", so that's what I am going to do starting tomorrow, starting with MMM, WHR and PCAR.

Wish me luck! More next week ..

Fabulous NDX trade not so fabulous (and an adjustment to strategy); Technical Analysis bye; Small Exchange one more feature

As regular readers of this blog know, the "NDX a.m. settlement" trade works 91.7% of the time (that's 12 of 13)  ...

Unfortunately this past week was one of the losing weeks:

Look at the peak on January 18 ...

To add confusion, the CBOE even now (5 days later) has apparently not released the January number for NDS, the settlement value that the trade value is based on.

But Tastyworks has the formula, I presume, so I got the bad news Saturday a.m.

I've been using this trade this way for over a year, weekly back when it was available every week then every month without fail. I had had trouble getting the trade filled too much later than 10am Pactific, so I had been executing it at 9:45 am ...

This time, though, NDX continued straight up all day; I was short the 6740 calls (80 points wide), but the NDS close was 6782.something. That's over a 50% loss for this trade. Yikes!

But I have been also managing this $2000 account and decided to try a one-lot (10 points wide) just before expiration for that. Executed immediately!

This one was short the 6760 call, so that would have made the trade I put on only about 1/2 the loss: 25% or so. (100% loss for this one, unfortunately, since I was just using 10-wide strikes on this small account. *sigh*)

So from now on I'm going to put this trade on just before 1pm Pacific ...

This really messed up some nice results I was showing: up 38% is now +1% ... up 40% now down 16-20%. Sheesh.

Technical Analysis: Bye!

As for technical analysis: I give up. Tim Knight first said 2603 was the spot where the /ES futures should stop. Then that broke through and said it was really 2626 ... Not useful for the way I trade, even though it's come back sharply since the latest Trump China thing turned out to be fake.

One Other Feature of The Small Exchange I'm Visualizing

I wrote last week about Sosnoff and company's latest organization The Small Exchange.

One other feature that I want: weekly (or better! 3x/week!) on all products. Since Sosnoff and company invented weekly options back in the day (they say), this seems like a sure thing.

This is something I can use: to go along with the still-Fabulous NDX trade once per month, an array of Small Futures spreads every week ... that should work!

More in just a few days ... 

One for two this week: small /ES (lost) and SPX (won) call spreads; new exchanges!

I looked at a 4-day QQQ and a 4-day NDX trade and the QQQ was too small and NDX more risk than I wanted to take, so instead last Sunday afternoon I put on an /ES short call spread: short the 2570 call and long the 2580 call.

This was transfixing because of the reward to risk ratio: $150 / $350 =  42.8% in four days! (Less commissions.)

Would that it were so:

Fortunately for one of the account holders for whom I'm trading, the person doesn't have futures access. So I put on an SPX call spread for her on Monday a.m., by which time the market was up enough that I put on the SPX call spread: short the 2605 call and long the 2610 call. This was for an 85 cent credit ... reward to risk ratio wasn't nearly as good as the /ES but still not half bad: $85 / $415 = 20.8%. Fortunately, this one won!

I'm not much into technical analysis, but had I paid attention to Tim Knight I'd have saved a little money ... he's saying we're still in a pattern that's headed lower, and his Fibonacci retracement line ... is at 2603.

I'm going to start watching him a little more closely, even though I'm still skeptical of technical analysis as a discipline ... but basically I'm planning to just trade small while waiting for the opportunity of the "fabulous NDX trade" ... which comes up again next week.

New Exchanges Coming

There were a couple of new exchange announcements last week, one from a bunch of big companies ... and one from my favorite brokerage:

The Small Exchange is from Tom Sosnoff and the Tastytrade/Tastyworks gang. They're not divulging details (other than a vague mention that products will be "smaller" than standard futures products now existing.) But I think I can imagine what this will be:

• Smaller notional values
• Standard options values, not like /ES = $50 and /NQ = $20, etc. Probably all will be $100 like current equity options
• SPAN margining (like the current futures markets)

Also ... Sosnoff's announcement of this downplayed the possible appreciation of the membership in this exchange, available free with a new funded Tastyworks account ($2000 or more) and $100 for everbody else. If the thing succeeds, these memberships could be worth a lot more ... and offer any trader a 50% cut in the already-low fees, so should be much less than standard futures fees ...

Unfortunately:

The U.S. government shutdown continues, including the SEC. This is stalling not only IPOs but these new exchanges from getting any motion toward approval.

More next week ...

Jay Powell rescues my long /ES position

I've been trading for almost 10 years now, and the extreme overreaction of the market to statements by the Federal Reserve (both up and down) ... has continually amazed me.

Today it was this guy again:

"Maybe we don't have to raise interest rates quite that quickly if the market is in the tank ..."

And so today:

This worked out for me, this time ... I was kind of expecting such a move based on settlement of the ongoing government shutdown, but no such luck on that:

Trump blames Democrats for shutdown: blah, blah, blah

I made the expected 50% on an /ES strangle, and I cashed out my long /ES position (20 points too early, it turned out) ... but that's OK.

Longtime readers of this blog know that I've been looking for an alternative to the "fabulous NDX trade" that was available every week but now occurs only once per month. I was relying on it exclusively until this change ...

But looking at the results of three different accounts I'm trading makes me think I don't need much to go with the NDX:

• My personal account since 5/17/2018: down 5% (due to experiments and stupid mistakes)
• Another account I'm trading for a guy, doing less experimenting with: +37% since 2/26/2018
• a couple of small accounts (starting with $5500 each or so 7/24/2018 and 8/10/2018: up 40% or so on average

So: can I just rely on the NDX trade and do just a few one-lot trades of miscellaneous types and get these kinds of results going straight on up?

One small test I'm running while waiting for the next NDX in a couple of weeks is with the "tastytrade method": at 45 DTE (Days Til' Expiration) put on your particular trade (Iron condor or Strangle) and hold until you are up 50% of the credit you got at the beginning. This worked great over this past crazily volatile few weeks, with CMG and TSLA dipping way low past the max loss point then coming back to 50% profit for TSLA and almost there for CMG... I reloaded TSLA for a shorter trade, just ahead of earnings ...

I think next week at least on my own account, I'm going to try the 4-day QQQ again (taking 40% if I can get it) ... but just a one-lot max loss of less than $900.

We'll see what next week brings ...

Wildly volatile week turns out OK after all ...

After this week I feel like I've been ...

(Well, maybe to Purgatory. I haven't read this book, either.)

I stuck with my long /ES futures contract all the way down and back up:

This guy didn't read "what every secretary of the treasury should know" before saying that he called all the banks ...

The banks said they were OK.

... but the market on Monday wasn't so sure, /ES closing at 2342.25 at the end of the 1/2 day Christmas Eve session.

On Wednesday, the consensus must have been "hey, we overdid it" and /ES rose nearly 5%. Thursday was also a crazily volatile day, with /ES dipping back below 2400 before sharply rallying at the end of the day, closing at around 2495. It flattened out on Friday, finally, closing at 2488.

Assuming no other crazy drops from here, that leaves me in good position long one /ES future (bought at 2503, back before the craziness) and short one /ES 2570 call expiring next Friday the 4th. I can let that one expire worthless ... or on a crazy up move cover it and get out of the way.

I also put on a couple of neutral trades in my own and client's accounts that were looking very shaky to the down side but now look shaky to the upside .. assuming the shutdown is going to be resolved next week. I'm almost back even on the 2245 / 2570 short strangle in my own account, and if it gets to being a small profit on Sunday afternoon when the market reopens I'm going to be tempted to take it and run.

Client accounts have neutral iron condors on TSLA, CMG and SPX ... SPX looks scary to the upside (short the 2550 call), but the TSLA and CMG were so beaten down that they have oodles of room to go further up just to get back into the green.

More next week ...

NDX a.m. settlement trade in detail; /ES futures give & take away ...

The "fabulous NDX a.m. settlement" trade won again this week, returning over 20% on the amount at risk ... when everything else was going straight down!

A friend from work (hi DW) mentioned that I hadn't shown exactly what I mean by the "fabulous NDX trade" I've been going on about in this blog ... since I had my whole trading strategy built on it
until Nasdaq made it p.m settled for three out of the 4 weeks.

Anyway, here goes:

• The trade goes on at 9:45 a.m. Pacific time on Thursday before a.m. settlement. This last one was December 20; the next one will be Thursday the 17th.
• It's a "one standard deviation iron condor" meaning:
• You sell 1 put and 1 call (or 10 of each, but let's start with 1, OK?), both near the .16 delta ("Delta" is the ratio of the rate of change of the price option at the indicated strike price as the underlying stock moves. So a .16 delta option would move 16 cents for every dollar the underlying stock moves) ... since this is a two-sided trade, you have to add the odds of losing on each side: 16% (rule of thumb .. more about this below) x 2 = 32% ... the obverse of 1 standard deviation.
• You then buy a corresponding put and call, each at least 50 points away from the short strike; more if you can afford it. 
• Settlement occurs not exactly on the opening price, but when each of the 100 stocks in the index posts an opening price. This is given in a daily symbol called NDS.

Illustrations:

This is an example of putting this trade on not the next day, but a month out. But the interface will look the same, just with different numbers. You get less credit (but not that much less ... I still got $10 to $11 on this trade last Thursday) but the short strikes are much closer together. For example, for Thursday's win I sold this one:

1. Sold the 6140 put and the 6370 call (x 2 contracts)
2. Bought the 6080 put and the 6430 call (x 2 contracts)

I got $10.50 credit, so the risk/return formula is like this:

credit received ($10.50) / (width of strikes ($60) - credit received ($10.50))

$10.50 / $49.50 = 21.2% ... not quite this good because of commissions, but I still took in > $2000 for about $10,000 risked.

NDS settlement value was 6244, so nowhere close to losing. Wahoo!

About the "one standard deviation" ... it's only a rule of thumb and in practice it usually overstates the risk of loss and therefore overpays ... I've been running this trade for over a year and have only seen it lose twice, probably in 24 tries. 

Why you want to use as wide "wings" as possible:

If you have $10,000 to risk on the trade, you can do it with 60-wide wings as I did, or 25-wide wings, and just increase the numbers of contracts. 

The return is significantly higher: 36% vs 21%. But you're much more likely to lose 100% of the amount you're risking than you are with wider wings.

Think about it: your "loss window" is 20 points wide instead of 50 points wide as in my example. So when the NDS value is just above your long call or below your short put, you lose 100%. I lose only about 40% on the same value.

Questions? Leave me a message here.

OK, now for the /ES futures saga. Where's a Santa Claus Rally when I need one? Basically it went down all week:

This would have been OK ... had I held onto my short /ES position ... but I was thinking it had been so far down it was due to recover or at least flatten out, allowing me to sell calls against a long position. So I bought one /ES contract (for my personal account only) at 2503.25. Then:

Oops; I get them mixed up. I meant:

So the futures market closed at 2421.25 Friday. Sheesh.

I have to think:

• This'll have to be over before too long ... 
• It's already "priced into the market" so should flatten out at worst or drift higher
• I can sell calls to make up the difference.

We'll see ... more next week!

Short /ES futures trade continues to pay off

The news this week once again seemed to be a drag on the stock market:

Huawei CFO who was arrested in Canada

And of course, "men of the year":

Overall this was great for anyone short /ES:

I closed out the futures butterfly trades I had on: wheat, soybeans and corn.

For some reason corn (/ZC) kept from showing a profit on an (adjusted) butterfly trade until about 1 week until expiration, and even then I think I took a small loss getting out of it. The other two "softs" behaved normally and actually I made an $800+ profit on the wheat trade.

Coming up is "expiration week" where the NDX a.m. settlement 1-day trade is available. So I'm planning to put the pedal down on this one, since it's the one trade I have not only research but a ton of personal experience with ... 

More next week!