Saturday, May 21, 2011

May 2011 Options Expiration Results

This is not the month I feel good about total transparency on the blog as it is a little embarrassing, but the bottom line numbers are that I have realized losses of (-$4,675), and head in to JUN expiration with MTM losses of (-$5,965). While last month was my best ever at $11,357, this was my worst ever and these results are directly related, and now I'm basically a complete wash for the last three months. Here is a shortened explanation of this month's results. I got myself in trouble on two separate trades on bond futures (ZB), and (RMBS). I got too comfortable with my past gains over the last few months in these names, which led to a false sense of security that enabled me to use larger size without having the appropriate associated risk management in place.

For the last five months on ZB I've been trading one contract at a time, this month I used two and three contracts at times, and when a particular OTM call trade ran against me I started trying to trade around it rather than just exit at my predetermined spot if we got there. I actually ended up exiting near my predetermined worse case scenario, but I panicked a bit when it got there and closed out prematurely. Because I had too much size in play I was no longer able to trade according to plan, I found myself now caught up psychologically in the amount of capital at stake. A very frustrating byproduct of this trade running against me was that since I was already too large, I had to use tight stops on future trades in order to keep my sanity. Every single one of these trades were stopped out for a loss, and every single one of them would have been winners had I traded according to plan. Once I got off tilt things got out of control in a hurry. I was left with a string of small losses and on winners, very disturbing to look back at the mayhem I induced.

With my (RMBS) marked-to-market losses I got stupid and sold JUN puts a week before the MAYs expired, that isn't part of my trading plan and thus shouldn't have been allowed. This came back to hit me hard as the stock dropped more than 20% on some old legal proceeding news. I do not view this trade as a mistake or error simply because the stock dropped, the error was that I doubled up on size by not waiting for MAY to expire first.

I typically try and sell a few thousand dollars of time premium a month ($3-4K) spread out over a few names, and then actively trade futures while I wait for time decay in the short options. So losing -$6,000 on a single short premium trade this month is not acceptable given my capital levels and monthly goals. I shouldn't be in the position to have several small winnings trades completely wiped out by one loser. However, when you're a short premium seller with no hedge then this sometimes comes with the territory. I prefer to use small size and no hedge instead of larger size and protection in the form of spreads and delta hedging. It is expected with this type of trading that you'll expire worthless most of the time but take large losses every now and then. But it is now time that I add spread trading to my arsenal. While I have a long track record of success with small size and no hedge, I need to be more nimble going forward.

I view my errors were not in omitting a hedge, but rather it was the size of my trades given the fact that I chose not to hedge. And I will admit that had I not lost any money I wouldn't have looked back and said I probably got away with using too much size, I would have just continued doing the same thing until/unless it didn't work. That's why I view this month as an inevitability and good for my future, so long as I learn from my mistakes and manage future risk accordingly.

The were two bright spots this month. One is that I did bring in $2,259 of short time premium on a myriad of names, which is part of the desired monthly goal. The second is that the losses I incurred are large enough to hurt and thus alter my future behavior of risk management, but not large enough to affect the operation in a meaningful way. For now I'm going back to where my success/comfort zone is in trading one bond futures contract at a time with no hedge, and trying to learn more about the nuances of spread trading. When you add a long option with a short then you've got to incorporate IV skew and strike price where as straight IV sells are a lot more intuitive for me.

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  1. Thanks for the post Jason. Hope all is well!


  2. Hey Keith, had a bad month but overall things are going good. Keep in touch.