Adjusted high probability portfolio with butterfly

The market has been showing signs of turning bullish at the intermediate term level, with the 2nd confirmation date on 11-23 (which is a half trading day due to Thanksgiving) as noted by IBD and an impressive bullish reversal day on 11-28.

Yesterday, RUT rose significantly and my RUT position reached the adjustment point due to both price increase and volatility drop.

I played with unbalanced butterfly spreads in order to reduce delta & vega while increase theta. Eventually, I settled on a 30 point wide Dec unbalanced butterfly as shown below.

The adjustment expanded the upper break-even point of my RUT position by about 10 points. So the overall portfolio P&L chart also has increased upper BE point as shown below. Note it's delta is still quite large at the moment.

RUT Calendar adjustments to high probability portfolio

RUT has been rising for the last 7 days. Though it may be near the end of this rally, the RUT position P&L curve showed the price entered its right sloping side. It's also reflected on the overall portfolio chart as shown below.

I did play with possible vertical adjustment for the RUT and could not find good trades that can keep the chart smooth. So I used calendars to extend the high break-even point of RUT by about 10 points higher. However, it did not add much distance to the right side of the overall portfolio chart as shown below. After the adjustment, the potential profit at the right side of the chart has good amount of increase while the potential loss at the right side also increased modestly. There was not much Delta neutralization in this adjustment.

Completed Jan High Probability Paper Portfolio

After setting up a position every other trading day in the last week or so, I finally completed the 2-month out paper trading portfolio today with a double calendar as usual. This is the 2nd option cycle for this test. I played Jan/Feb vs Jan/Mar DC's of identical strikes shown in the image below, and found the Jan/Mar DC provided about 1.9 to 2 times of the values of Greeks and cost, when compared with those of Jan/Feb DC. The main reasons I chose Jan/Mar DC are flatter P&L top and higher theta (9 vs 4.8). Note the margin requirement is $8,000 at the analyzer, while it was $6,000 for last option cycle which had similar positions.

In the two month out portfolio, the probability of expiring beyond break-even points in Jan is around 6 to 20% at the moment, even if the short options usually have delta around 0.25. This portfolio has a significantly higher probability than the front month portfolio for a trading period of 30 days approximately.

In the last cycle for December options, the portfolio ended with a small gain. But it's more encouraging in that it had reached current target of 10% profit before dropping to final closing value. This 2-M portfolio also is characterized with low maintenance efforts due to its wider profit zone.

November Trade Review

As part of my trading process, it's time for my monthly trading review for November, based on my template for the review.

Trading Rules

• Adherence consistency

Did OK on this one. Did not attempt anything fancy-:)

• Skillful application/execution

Made a regrettable error in rolling IC. Since I had not done the IC rolling for a while and did not review the IC rolling rules for a long time, the rule was kind of hazy at the moment when market was surging quickly. I was carried away by the temporary market rises on stronger volumes for a couple of days and moved the new IC boundaries too high. The new short call had delta of 0.25, which was unnecessary. This move costed over $350 extra. The proper move would be moving strikes to such a higher place that the new IC would not cost anything extra, even if the delta would be around 0.35.

• Monthly rule review/study

Need to spend time this weekend to review/update trading rules. The update is to include a new "must have" step to review potential cancellation of strikes in existing position when new order is about to be placed. The longer expiration option trading rule, mentioned in the last month review, will be updated next month most likely, after further paper trading and analysis.

Psychology

• Action during uncertainty

Good. Not much hesitation in initiating or adjusting trades.

• Risk Comfort ability/Adverse damage impact

Need futher study on risks at adjustment points.

• Trade anxiety
• Winning Altitude Development

I did work on the psychology of consistent winning altitude and plan to complete it later this month.

Trading Time

• Trading days

I was overwhelmed in daily hours by the adjustments this month. It far exceeded my 15 minutes daily average expectation. If I were trading the 2 month-out paper account, I would be nicely satisfied with my time requirement. Plus, this method appeared to be even more smooth process.

• Rest days

Did trading process related studies.

Trades and Market Replay

• Market Forecast

Did OK.

• Trades and Adjustments 

The break-even zones are shown in the following image capturing my trades for November. The oval days were closing days. Overall, it has a little bit smell of over-adjustments, probably due to my trading error on the IC roll as described above. Still need to work on the risk tolerance part to have better adjustment points.

Adjusting portfolio with calendars

Market continued to drop in the last couple of days. The portfolio reached a delta of 22 with price shifting to the middle left side slop of the P&L curve. If SPX dropped 1o (78 points), the portfolio loss would be around $3000 as indicated by the analyzer.

So, it's time for an adjustment. The suffering side is the RUT double calendar. The Dec/Jan$740p calendar would be normal adjustment for RUT. But there is already a Dec$740p long position in the portfolio. So I used the Dec/Jan$740c instead. The call calendar costs (<$1.00) less, has a little higher delta and provides less ($2) Theta as well. Vega of the two calendars appear to be similar.

Rolling down IYR diagonal

IYR broke major up trend support and 200 dma. I rolled half to Dec$63c yesterday for a credit of $0.86 and another half to Dec$62c today for credit of $0.85.

On 11-2, I had to roll up to Dec$65c for a debit of $0.88 and Dec$66c for a debit of $1.33, due to short delta rising above 0.7.

Since IRY had been going down straight for many days, I'll wait to see if a rebounce is weak enough to headge the long term bullish position.

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Created with ProphetCharts®

Completed Dec High Probability Option Portfolio

Encouraged by the performance of the early-starting high probability portfolio and strategies, I completed December's inventory with 37 days to expiration. The idea is to gradually move to establish the positions earlier so that the portfolio has wider break even points.

Fixing an error in trade order for smooth portfolio

I started to build up my December option inventory in the last couple of trading days. But I made an trade order error when placing an order for SPX IRON Condor: my new long strike of Dec$1445c happened to cancel my existing short strike Dec$1445c. I noticed it after the order was filled and the P&L dropped a couple of hundred dollars in the analyzer. The margin requirement also increased $2000 more than what's normal. So I did two more verticals to get the margin back to normal and formed two IC for the SPX position. This error will probably cost the portfolio around $100, considering the transaction cost, commissions and market price drifts.

I know it would be an error. But I forgot to examine existing positions today. To reduce this type of errors in the future, I'll add a specific trading rule: when creating new orders, I must review existing position and make sure there will be no deletion of existing positions. It must be part of my order review process.

The Successful Mind Set of High Probability Traders

As part of my trading process review, I studied the trading psychology in the last couple of weeks and plan to go through two major psychological areas in a couple of my posts.

• The successful state of mind of high probability traders
• The integration of the successful mind set with the high probability trading rules

Today, I'll go through the first topic about the mind set and winning altitude. High probability means a good chance of success over a large amount of events statistically, but it does not guarantee success for any specific and single event during the process. So successful traders must have the following carefree state of mind to accept the uncertainty of each individual trade.

1. Any outcome is possible after a specific trading action is taken.
2. Market can give us a win or a loss at each time randomly. 
3. Market is unique every day without any exact association with its past.
4. The high probability rules provide a higher probability only and guarantee overall successes  statistically.
5. There is no need to know market's next move to make profits. We must know what we will do next, based on any possible market moves.

To achieve success consistently in high probability trading, we must integrate the following actions with our trading process.

1. Pre-define risks of every trades
2. Completely accept the risk or take action to eliminate non-tolerant risk
3. Objectively identify trading opportunities
4. Execute trading rules for each opportunity without reservation and hesitation
5. Reward ourselves as market gives a win for us
6. Keep monitor trading processes and susceptibility for making errors

Rolling down of Dec SPX Iron Condor

Market sold off hard after the election day. In the paper-traded 2 month out portfolio, the SPX positions showed a need for adjustment. Specifically, market price has fallen into the left slope of an  iron condor curve. So I rolled the IC down about 20 points. I still got an extra credit of $0.65, due to the higher volatility and plenty of time to expiration. The new SPX P&L curve is shifted left side about 20 points now. Note the portfolio had a 10% profit of $600+ yesterday before the sell-off.

Closure of November Option Inventory

With 9 days left for the expiration, I closed all remaining November positions to avoid any surprises after the election. The VIX increased yesterday while SPX rose ahead of the election. On the election day, VIX dropped about half a point at mid day time, causing my Vega positive portfolio to lose some value. Since the remaining positions were mostly calendars, the portfolio Vega was the major contributor for the small market moves. It was a little bit strange that all of my SPX closing orders that were $0.10 above mid-price got filled instantly.

Yesterday, I trimmed down my inventory to reduce risks. Closure of IC neutralized the delta and closure of the double calendar reduced the Vega as shown in the images below.

On the paper-traded 2 month portfolio, it has been very smooth up to now. I plan to close it around this Friday. It's very encouraging time-frame that requires my further study soon.

A Glimpse of option strategies of Karen, the super trader who made over 100M profits

I watched the Tasty-trade interview video for Karen, the super-trader today. It was so inspirational and I have to note down the highlights for future study. Here's the list of the key points that I have captured at the moment.

Trading Vehicle: options for SPX, RUT, NDX

Strategy:

• short puts and calls, combination short strangles. 
• Better profits than Iron Condors but has unlimited risk in theory.

Option strike selection

• Calls: 90% probability of success (10% ITM prob.) and above major resistance level
• Puts:  95% probability of success (5% ITM prob.), corresponds to about up to 12% SPX drop
• Usually sell more put contracts than call contracts
• Around 2 standard deviation Bollinger bands

Option cycle selection

• Start with 56 days (8 weeks) before expiration to get wider profit zone and open with 50%+ positions 
• Also may adjust with options of same cycle as the starting position for average market conditions

Entry (Legged in)

• Sell calls when market rises
• Sell puts when market falls

Exit (It was not really clear to me at this point)

• Usually exit in a month
• Profit target is around 15% of positions
• Will let further OTM (1% ITM probability) options expire worthless

Adjustments: Use additional capital to keep profits and TOS analyzer tool

• Start adjustments when ITM probability reaches a certain number, like 30%.
• Normally, keep identical profits by rolling up/down/out and selling new contracts.
• Under extreme market sell-off conditions (1000 point drop in DOW JONES average), give up profits of a few month to roll out a couple of months and wait for market to settle down.
• No stop losses, No delta neutralization via call/put purchases.

Money Management

• Suggested usage of 50% of capital
• With adjustments on, use up to 70/80%
• Large use of capital justified by wide break-even points
• Watch net liquidation values (I'm not clear about it)

Psychology and Mindset

• Trading is a number's game
• Focus on the probability, not P&L.
• Manage trading process
• Losses are acceptable (No fear)
• Lower returns caused by lower market volatility are OK
• Keep rules simple and anything else are noises

Trading Time: Monitor markets during all trading days and hours

Trading Team: 5 traders of similar mind and 1 accountant

Closing down high probability portfolio option inventory

Market jumped up today, making the portfolio delta switching from around -15 to +17 with gamma around 1.7. With 14 days to expiration, it's about time to close down the inventory now. The big delta change was mainly caused by the RUT vertical spread hedged last week.

So I closed the vertical and the iron condor of the RUT, leaving a double calendar alive which is pretty much at the center of the strike prices. The SPX P&L curve is still looking normal with delta around 2. After the adjustments, the SPX-weighted portfolio delta is around 3 with a theta over $100.

I plan to close all November options in the next few trading days.