Forgive me as I usually keep the posts on this site strictly to write ups of actual trades or something relevant to trading. I try to keep things pertinent as I get discouraged when I see people blog about nothing in particular or put up links to other sites just to act as if they are doing something. So on this post I wanted to self indulge a bit in order to share some stories that I hope resonate with somebody out there who either currently follows or finds this blog sometime down the road. I’ll warn you ahead of time it turned out to be a long post.
This past weekend I found myself looking through some old files on my computer. I was a bit taken back by what I came across. This ended up being an eye opening experience for me. The screen shot below shows the spreadsheet of my first ever foray in to trading with options that wasn't related to writing covered calls. From 2000-2007 I strictly wrote covered calls, which at the time was a third income stream for me so I just looked at everything as a bonus and wasn’t real concerned with what I was doing. I had absolutely no concept of what implied volatility was, thought technical analysis was for morons who would believe anything, and greeks were something out of a history book. For some reason the light finally went off in my head and I started viewing other ways of using options. Why it took so long I'm not quite sure, I think because prior to this time period I had a successful business that kept me busy seven days a week. There just wasn't enough time or interest in pursuing options any further then writing a call once a month and checking in later to see how things turned out.
Flash forward three years and my oh my how things have changed. I currently would never make a trade without consulting the technicals or implied volatility, and I now incorporate the greeks when viewing my portfolio for risk or constructing new trades. The next revelation of running across this old spreadsheet was how shocking it was to see that the first 39 trades over the course of one year were 100% premium buys, speculating. Looking at my trades for the last year, I haven't bought a damn thing, it's all premium selling. This is something that occurred kind of below the radar for me. There wasn't a day when I made a conscious decision to stop one in favor of the other. But backtracking the situation, I know where the turn came.
During the financial crisis I finally started becoming aware of what implied volatility was and how it worked. I was buying $10 ITM puts on the DOW using DIA and waiting for a $1 move and making 10%. I did this several times for $1000 each and was just in love with the concept. I was usually paying something between .80-.95 extrinsic value, so a $10 ITM put was costing me $10.80 or so. So as the crisis starts to hit the shitter I start noticing that a $10 ITM put cost $13.50 now, and I'm thinking, WTF? This was great as it spurred me to find out what was going on and it obviously opened up a whole new chapter for me with trading options. So my point or question to you is, do you ever analyze your past and compare it to your present? Have you abandoned profitable strategies or trade concepts in favor of something else and just never made your way back to something that makes sense for you to be doing? Have you ever come across something trading options that you don’t understand and haven’t bothered to find the answers?
Another thing I noticed about my evolution as a trader is that I no longer run and hide or stop trading for a while when I take a loss. Take a look at the second to last trade from the bottom that is highlighted in red, I had never lost anything more than $600 before, so losing $2000 in literally one trading day scared the crap out of me. I thought, what if this happens again!! So judging by the dates on the sheet it looks like it took me two months to venture back out and make another trade. This is something that currently would never happen. A loss is a loss, and usually I know ahead of time what my worst case scenario is because I like to structure my trades with at least an attempt at a known maximum loss. So when this occurs it isn't anything for me to be worried about. My point on this story is evolving and implementing a designed exit on all my trades has helped me tremendously. If you’re not using predesigned exit points then contact us and we’ll show you an example of how we structure trades. Or just take a look at any recent trade post as that should be a good example.
The last thing I want to point out is really just kind of a personal story. That first trade highlighted in red on the top left, when I closed that out for a win and kind of solidified that I understood the concept of buying ITM calls, that was another pivotal moment in life. It was like the day the light went off in my head when I understood the concept of writing a covered call. Since I had six or seven years experience with that and had brought in a lot of extra revenue, this started my train of thinking that with this new tool in my arsenal and the desire to learn more strategies, I could probably derive enough monthly income to pay the bulk of my bills for an indefinite period of time.
So the next three trades on the spreadsheet highlighted in blue, when I closed those out for gains it solidified for me that I was ready to leave my employer and head back to school full time to get an MBA and buy myself some time. I closed those out at the end of January, gave two weeks notice at work and have been on my own since mid February 2008. I figured I had 18-24 months to figure out the next phase of my post self-employed life, but I wouldn't have been able to do it without options, they have literally changed my life. Life is one long strange road and as it turns out, during those 24 months I got better at trading, fell in love with it actually. And after a brief attempt to find a formal job in the options/futures industry that wasn't a fruitful experience, I decided to just go it alone. I have enough capital and track record that the risk/reward of taking a shot at this makes sense for me.
I actually did my taxes yesterday and in 2010 I made $52,700 trading. Not bad for somebody who considered himself to be supplementing my expenses with trading until I could figure out what I'm going to do with my life. I think I just figured it out. I’m just over $100,000 since the first trade you see on this spreadsheet. That is not only good enough for me to justify continuing down this path and forgoing looking/begging/groveling for someone to hire me, but it’s also extremely self-empowering and rewarding. I was nervous about leaving a formal job with a pension and I knew I wasn’t going to be able to make enough trading to equal what I made there, but I was willing to take the risk. I think failing to find a job in the options industry was another pivotal moment, I said screw it and decided to hire myself. I recently set up my account to automatically withdraw a paycheck every month and I have all the confidence in the world now that over the long run I can take out the amount I need every month without dwindling down my capital.
So if anybody has read this far I apologize for such a long rant but I also thank you. If you know anybody who might benefit from this story or talking with us then please forward it along. The last few days have been amazing for me. I reached a psychological state that is very healthy for me. A blind leap of faith three years ago and strong desire to be happy and follow my dreams in life has paid off. If there is anybody reading who has a similar story, please drop us a line. If there is anybody who wants to follow a similar path, please get in touch with us.
Before I end this I want to say a public thank you to two people who play a large role in my evolution as a trader. The first is my friend and fellow blogger on this site Dominic. What seemed like a chance meeting with him a few years back turned out to be the quantum leap for me as a trader. Before that time I only knew one person who invested with options and he was and still is today just a covered call guy. So when I was venturing out and wanted to expand my universe of implied volatility, all the basic option strategies, the greeks, etc., I didn't have anybody to turn to. No mentor, no peer group, it was a really lonely and frustrating place. It turned out that Dominic and I were interested in similar styles of trading and at a similar place as far as current knowledge and goals for the future. Over the last few years we’ve been able to help each other immensely with furthering out trading knowledge and experiences.
The second person I need to acknowledge is Dan Passarelli of Market Taker Mentoring. Dan runs his own business as an Options Mentor and I personally studied with him for a few months that turned out to be another huge evolutionary step for me. It turns out that I was further along the path then I realized, Dan helped tie up some lose ends for me and aggregate a lot of fringe ideas I had but wasn't previously able to bring them all together on my own. I only wish I had hired a mentor sooner because I was ready for that step a good year before I did it. The end result for this step for me was leaving with much higher self confidence and the empowerment to trade with larger size. That's a game changer if you're trying to make the leap from $20,000 a year to something more resembling a true income. If anything about this story sounds familiar to you and you think you would benefit from a mentor, Dan can be reached at the link provided and please tell him I sent you. If you have any questions about my experience my email address is at the bottom of this post. Dan's Website is MarketTaker.com
This brings me to the last thing I want to share, if there is anybody who follows our blog who might find themselves in a similar situation where you're looking to advance your trading knowledge, find a friend, mentor, or just somebody to bounce trading ideas off of, then by all means please contact us. We're actually looking to expand the blog with new writers and find greater synergies amongst each other. Please see the "About our Blog" tab and let us know if you're interested in joining us.
E-mail: JasonAndrewHaas@aol.com
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Greate Post. Thanks for sharing with all of us.
ReplyDeleteHow were almost ALL of those trades so damn profitable?
ReplyDeleteHi Brad, thank you for contributing on the blog. To answer your question, I don't know, beginners luck, intuition, lucky to be in an environment where we weren't going sideways? The market was going up and then went straight down so playing the right direction made things look easy. I'll be honest and say I wasn't quite sure what I was doing. That's why I was taking the trades off the table when they made a few hundred bucks. I was more worried about losing anything. The truth is I didn't believe it either and that's why it took me over 8 months before I had the courage to increase my contract size from 5 to 10. There was a lot of money left on the table during that time by not believing in myself.
ReplyDeleteIt also looks like the first few trades took 40-60 days, that tells me that they were losses on paper for much of that time because I was only looking for a $1 move in the underlying stock. If it took that long to happen then I was probably under water on those. I really don't recall since it was three years ago. But I do remember that once we hit August it felt easy, it was clear the markets were in trouble and then Lehman went down and it got even easier. Just as the last 24 months all you had to do was buy anything long and you've made money, at that time all you had to do was buy puts and you made money. I only wish I had more experience or confidence at the time because I should have been getting rich and not pecking away trying to pick up small victories.
Very interesting story, in many ways parallels my evolution to option trading, going from knowing very little to having a fairly sophisticated understanding in a short period of time after immersing myself in the field.
ReplyDeleteI was wondering if you have any experience with futures. For me, futures now are somewhat like options were to me a year ago, I have a basic understanding but have not traded them and I know that there are nuances that I am unaware of. However, days like today (Sunday) make me wonder if there might be a big advantage in adding that to my arsenal, if for nothing else just the ability to take positions when the majority of the public cannot trade. For example, after hearing about the disaster in Japan all weekend one might anticipate the general public causing a sell off in the market Monday morning. If I could trade futures I would have the ability to take a position right now rather than waiting until the vast moajority of the public can do so at market open tomorrow. Obviously you might win or lose based on your premise, but just the ability to make those bets when most people cannot because they only trade during US market hours seems like it would give the futures trader an advantage. This is something I would like to add to my arsenal, especially as a way to hedge existing option positions that I have. Do you have any opinions or experience with using futures?
sandeep
Sorry, I just looked at the blog and see you have made a post about trading ES just a few days ago so obviously you have some futures experience. Do you have any advice for someone looking to add futures to their repertoire?
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Sandeep, thank you for writing. I absolutely agree with you that adding futures to your arsenal has an advantage. However, the advantage is not in that the majority of the public cannot trade them as you've said, but rather that most just don't. Whether they are too complex to understand, the capital requirements to trade too great, or any other reason, it is still a rather small field. Though I believe the volume of futures is now growing exponentially like options have the last ten years.
ReplyDeleteI found my way in to using futures for just the same reasons you are mentioning. I don't remember the exact event but I remember the feel in my stomach watching news over the weekend and seeing the futures vastly changed on Sunday and not having access to offset your equity options positions until the next day. I have used the ES a few times to hedge now and very glad I have that as part of my game.
If you were able to immerse yourself in options and understand them in a quick period of time then futures will be even quicker for you. Then futures options work exactly as equity options only the underlying asset is not 100 shares of stock but will be different for each instrument. I guess my suggestion would be to open a paper trade account if you don't already have one. It sounds like you would primarily be interested in the financial futures to start with so I've included the link below to the CME website page for that asset class. If you're wanting to hedge the S&P you use ES, use NQ for the NASDAQ, and YM for the Dow. Let me know if you have any questions once you take a look around there.
http://www.cmegroup.com/trading/equity-index/
JasonAndrewHaas@aol.com
Thanks for the link, I checked it out and have also tried some paper trading of ES tonight. Next project will be to figure out the best ways to use ES to hedge risk in my option positions - a subject I have not seen discussed much. Regards,
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Sandeep, I would suggest to look up articles on Delta Hedging to get you started on how to use futures to hedge equity option positions. There is no one way or right vs wrong, it really depends on what type of risk you want to hedge and to what degree. I personally don't have a large enough portfolio of positions where I need to delta hedge. I'm only familiar with it on a conceptual level.
ReplyDeleteThanks, will do. I see Don Kaufman on tos is doing a session about risk management using futures today at 3:30 CST, should be just the sort of thing I am looking for.
ReplyDeleteS
I was planning on watching that today myself.
ReplyDeleteGood presentation by Don, basically reinforced concepts that I have heard him discuss in previous sessions.
ReplyDeleteAs I mentioned, I'm trying to figure out if there is a good way to use futures as an adjustment or hedge to my existing option positions. I'll give an example of a typical real example that I have right now. As part of a SPY iron condor I am short the March 129/128 Put spread (March 135/136 call spread is the other half which should expire harmlessly). I have 30 contracts, so at the moment the position has delta +290, theta +34. Just to make the math easy let's assume I had 60 contracts with delta +580, theta +68. So the question is this - if I wanted to protect myself against a downturn in the SPY which would put my short put in the money, would selling 1 /ES contract be a good strategy? As I understand things it would reduce my delta by 500, but it should not affect theta, which will accelerate in the last few days before expiration.
So I'm thinking of this in terms of adjustments in general. For the position we are talking about I made an "adjustment" last week when SPY was 132 but I was concerned about a down move, that adustment was to buy a 130 March/April put calendar, with the thought that the calendar would make a little money to offset losses if I was forced to buy back the put spread at an unfavorable price.
Regards,
S
So back to my example - it seems like if I were to sell the ES future it would make the delta about 0, and allow me to stay in the trade to collect the accelerating theta with very little directional risk (at least for the first $1 move in SPY - but that is a pretty good size move in SPY and with only 4 days to expiration it's conceivable that it could stay in a $1 range, at least for a few more days. Any comments/advice would be appreciated.
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Sandeep, let's look at this from a theoretical point of view and a practical. Theoretically you seem to understand the basics, which is that yes short one ES would give you negative delta exposure of -500. But let's talk about practical. If you're short an iron condor, then by the nature of the strategy you've used you're already hedged. You already know your max loss ahead of time. It sounds like you've already made an adjustment, which is technical talk for taken on a separate or offsetting trade along the risk/reward curve. So your strategy itself of an iron condor contains a hedge, then you've hedged your hedge with buying more puts, now you're thinking of hedging some more with the ES?
ReplyDeleteMy suggestion would be to just paper trade this actual scenario this month using the ES and see how things play out by expiration on Friday. You mentioned that its conceivable that SPY trades in a $1 range, that's your thought or desire, what really happens is out of your control. Now something that Don didn't mention today which he should have, is directional risk of hedging. It sounds like you're trying to hedge the risk of SPY going below 129 this month. So let's say you short one ES and ES drops 20, you'll be glad you hedged. You actually WANT the market to drop out of bed because your losses on the iron condor are capped but you can make money on the short ES down to 0.
But what he didn't talk about is risk management of direction. So let's say you short one ES and then the market reverses sharply, again your gains are also capped on an iron condor but your losses are on the ES are not. So unless you're going to literally screen watch and get in and out exactly every time SPY crosses the 129 threshold then hedging an iron condor doesn't make sense. So take today's chart for example. If you got worried and shorted once the futures market opened down big, it was up 10 points a few hours later, that would be a $500 loss if you were short one ES contract. So hedging with futures works great as long as it goes in the direction you're hoping, but it can also work against you.
Yeah, I understand that if you did try to hedge the position with a future you would have to watch it closely for reasons you mentioned. At the moment with futures down about 25 points that ES hedge would be looking pretty good if I had it since that 128 short put is probably not going to be in great shape tomorrow morning.
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I've never looked into it much, but I think the strategy I was envisioning might be some variation of gamma scalping - in this case using a futue to keep the delta 0 and collecting the theta. I am sure it would fail miserably as the spread would not be able to keep up with the future, and even if there were a way to do this with just straight options or stock it is not something a small retail customer could ever make work.
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I fell victim to this scenario last summer. I was short a SPY ratio spread and it was one of those days where it was ripping to the upside. I forget the strike price but let's just say it was 1080 and my short SPY was 108. The futures kept fluctuating back and forth above and below 1080. So unless you're around to watch and getting filled exactly at 1080 each time you're just playing a losing game. Between the headache and commissions I decided I wasn't really interested in trying to micro manage that type of situation in the future.
ReplyDeleteSo I just peaked at the ES and a short position would have made you very happy this morning but unless you pulled it off the table at your entry point you would be upside down on it right now. This type of trading (hedging with futures) doesn't fit my personality and I usually stick to trades I don't need to actively manage. However, it's a very valuable and useful tool so I'm glad I'm aware of it.