Saturday, April 16, 2011

April 2011 Options Expiration Results

By one measure this was my best ever month financially, but just as I felt that last month's tally of $575 didn't paint the whole picture, I also feel this month wasn't as good as it looks. Though I've had bigger recorded gains in a month before, most of those gains were from long-term spreads that were building in value over time and finally got recorded in the month they were closed out; where as all of this month's gains were derived within the April options expiration cycle. So I am excited to book $11,357 in gains derived from the last few weeks of trading, but the instruments and leverage involved has to be kept in context. Up until about six months ago I was almost exclusively an equity options premium seller, now I'm also trading futures and these cut both ways. Last month I only had a few losing trades, but two futures trades in particular almost completely wiped out about 15 winning equity option trades. This month my futures trades went my direction so the gains look big in comparison.

The Nat Gas profit of $3,042 this month needs to be held in context with the ($2,306) loss I took on that trade last month. In my view this was a rolled contract with a net gain of about $700 over a two month period. And though I'm very happy that my short bond futures paid off over $8,000, that trade could have also moved against me and I'd be sitting on a large MTM loss right now. I color coded my trades again for me to analyze more than just the bottom line profit or loss. I'll go back at the end of the year and maybe create a pie chart or something to breakdown the performance. I had a few scratch trades this month where I either decided against them shortly after or tried to exit for a few pennies above trade price to cover commissions. Though the net result is near zero and I don't like to incorporate scratch trades in to my performance, I also don't want to omit them from the record.

I also fell in to an old bad habit this month and got away from my game plan a bit. Since I had a large position in bond futures I found myself watching the chart literally every 20 minutes or so whenever I was awake. Since futures trade almost 24 hours I find it hard to ever stop thinking about it. So we had a relative dead spot for a few days where ZB traded in a small range, when you're watching every few minutes two days of small movements feels like forever. So I entered a few trades that didn't make sense for me as I was just feeling the need to try and make something happen rather than just be patient. I did recognize this behavior shortly after as I try to objectively analyze my positions each night. So I admitted the errors to myself and exited the trades soon after. I won't go in to detail on each mistake but let's just say this was the only thing keeping me from a perfect performance and admitting this would have otherwise been a phenomenal month for me. So my record shows that quantitatively I am getting better, I'm more efficient with using my capital, better trade entries/exits, better risk/reward management, but I also still have a lot to work on and I'm mindful of that.

 April 2011 Options Expiration Results

Updated Historical Results

Current positions heading in to May 2011 expiration cycle


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  1. Congrats on a great month. Do you follow any rules about deciding when to close a position that has worked well for you? For example, we were both in RMBS and I see you closed the trades out. I let mine expire, and that worked out fine, but I have also been burned before by not closing trades out for 5-10 cents when they really looked like they would expire worthless and then had to buy them back at much higher prices when the trade went against me. So I am trying to decide if it is better practice and more profitable in the long run to always close out, and just accept that a lot of times you will be buying back something that would have expired worthless.

  2. Congrats Jason!!! So what's your gameplan for May? I'll call you today or tomorrow...

  3. Sandeep: I don't have a formal rule on when/if to close a trade early. I did struggle for years and refused to ever close something early. I felt like I was writing a check for on reason, why pay something that's probably worth nothing right? But I got over this sometime in the past year. I'm commented on this subject on the blog in the past. I actually never got burned by not closing something out early, but I decided to start doing so for a few reasons.

    The first is I noticed I was spending just as much time (psychological capital) managing a position no matter how much premium it might have had left. The second is once I got a better handle on risk/reward trade offs and using capital efficiently, it made sense to close out certain trades early. I got comfortable with locking in 90-95% of the trade in exchange for 0% future risk. For instance, this past month on the RMBS trade we did. At the time I put the trade on it made sense because IV was high and earnings weren't until after expiration, but the trade went about as good as it could for me. IV came down, the stock traded sideways so we picked up theta. Because this particular trade was a short strangle, I got less comfortable with the remaining reward being a total of $60 when my risk was unlimited. Even though I didn't face earnings risk there is still general market risk, takeover risk, etc. When I was faced with a $1060 reward for that same risk I felt it was justified, when faced with $60 reward for five more days of unlimited risk I no longer wanted so stay in the trade. I also have to admit that sometimes I close trades out early if I've had a good month and I the cumulative total of remaining reward is a fraction of what I might have already booked. And vice versa, if I've had a bad or slow month where I didn't make very much, then I usually let them go to the end and try to squeeze out all the profit.

    I also have a loose rule where if you can book something significant like 75% of the total profit in less than 50% of the time then I take it off and maybe look to put the same trade back on later. So I've gotten lucky a few times and sold a short put and the stock takes off to the upside immediately, IV comes down, delta moves in my favor. So I try to look at my trades each night and see if I would still put them on today. In a case like this the answer is sometimes no, so if you wouldn't put a trade on today then you can't leave it on either because the risk/reward of those two scenarios is exactly the same. It took me a while to accept that but its true.

  4. Mark: No game plan right now, since it's a 5-week expiration I usually sit that first week out and don't feel that I'm losing anything. Since we're at a such a low VIX I'm not really interested in selling any premium here, so hoping for some new developments in this first week and maybe find something to do. I'm content with sitting out every now and then and not playing, or playing small. I am short one bond contract and short a few OTM calls that expire on Friday so I might just be trading around that for a while until/unless something else develops.

  5. That makes a lot of sense, particularly regarding RMBS as you had naked options. I had spreads but still would have felt very foolish if something had happened in the last week to turn a $1000 profit into a $3000 loss.

    I struggle with positions like my IWM May 89/90 spread which I mentioned in an earlier post. Sold it for 23 cents, now the short option has a probability of touching of only 16% and a probability of expiring of 8%. It looks like I could close the position for 7 cents, but if were to do that my net profit after accounting for 3 cents in commissions for the entire trade would result in a profit of only 13 cents. That sounds okay, but the problem is that when I got my 23 cents credit I accepted 77 cents of risk. This trade may go my way, but if I do it many times there will obviously be occasions when it doesn't go my way - so is taking the 13 cents now when the odds look like they are in my favor really the smart move? At times like this is it better to try to get more or max profit to make up for the inevitable losses that will come when the trades go badly?

    Those are some of the questions I struggle with, but if I were not in this trade already I would not put it on for just 7 cents. I suppose that is a good indicator of what my next move should be.

  6. Nice returns. What is your capital base and risk per position?

  7. Sandeep: I don't think there really is a right or wrong on when/if to exit a trade early. Each trader has their own set of risk/reward parameters. For me, having at least a rough frame work like reevaluating positions to see if you still like the remaining risk/reward has served me well and helped preserved a lot of psychological capital since I implemented this rule.

    Brad: I have $200,000 in the account but have never considered it all available to trade. I just keep it there to give me the buying power flexibility to do what I want. I have been very conservative on my trade size and don't have a set risk parameter per trade. I tried to give myself those boundaries a while back and didn't like it as depending on the trade idea there are times I don't want a limit. I choose to play small with no boundaries. For instance, I currently have short exposure to 4 ZB contracts at 122. I do not have a stop loss on this position as I'm willing to let it run against me. I have a secondary target to add to the short position should it run to 125. If it were to get there and I added to it, then I would have a stop loss in place. So I have theoretical unlimited risk, but with only 4 contracts I'm comfortable with that risk when given my capital levels to trade with. When I was doing some define risk spread trades a few months ago and I didn't feel as strongly on some of those and wasn't prepared to let them run against me, I set a maximum threshold of a 1% capital loss per spread. My acceptable levels of pain really depend on each individual trade.