Completed April Option Inventory Build-up

Yesterday, I completed the April option inventory by purchasing the RUT double calendar. I initiated the April positions in the last few days, adding an iron condor position every other day. Since my market outlook is bearish at the moment, I used the DC to finish the April portfolio and reduced the portfolio Vega significantly to -76 as shown in the image below. I chose the April/June DC, because it offered flatter profit zone when compared with the April/May DC.

During the DC order execution phase, I started with $20.15 which was $0.05 above middle price. But my orders could not get filled for about 45 minutes by my broker who offers better commissions than TOS. I had to increase my bid price by $0.05 multiple times eventually, after waiting about 15 minutes for each bid. In the meantime, I could see occasional drop (lasted a couple of minutes) of the mid price in TOS to be $0.20 below my bid price. Overall, the ask price drifted higher at my ordering period. The price of RUT was creeping up and the Delta of the DC was -1.36. So the Vega (volatility) must be increasing quickly to raise the mid price of the DC. It seems to confirm that front month spreads are easier to be filled and multiple month time spreads (particularly several month away) are difficult to fill.

Performance Review of 4th Quarter, 2012

I finally had some time to do a review on my 4th quarter performance for last year. The purpose of my various trading reviews is to identify the strong and weak points in my trading from different angles and perspectives. With quarterly performance reviews, I hope to examine my trades and their performances at a higher level. I plan to work on a quarterly review template in the future in order to come up with proper contents for the review. It will probably be a good idea to illustrate monthly P&L in some of my option cycle charts.

I used a spreadsheet to calculate the P&L and commissions of each trading month for last Oct, Nov and Dec. The quarterly profit was not too bad, considering there were a few trading errors made as posted before. It received a profit of $1,100 approximately. Oct and Dec profit was in the expected range of 9% ROR and 5% ROR respectively. The Nov trade was basically flat. I reviewed my November blogs and realized there were two issues in the Nov trades: too much Detla adjustment and trade cancellation error.

Overall, I also think there might be some over adjustment issues in the quarter. I'm also looking into further analysis of my trades to determine how to provide proper amount of Delta adjustments. I think I will be able to improve my trading rules based on more data points from my future trade analysis.

In the next quarter, I need to improve on the following areas (ranked in the order of challenges):

• Proper amount of Delta adjustment
• Avoidance of over-adjustment
• Elimination of known trading errors

Closure of IYR Bull Diagonal Spreads

Due to the current week market conditions outlined in the previous post, I decided to close all of my IYR bullish positions. I plan to enter new bull position trades for IYR when market resumes the uptrend.

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Created with ProphetCharts®

Closure on EEM Bull Diagonal Call Spread

This morning, the market dropped on higher volume again. Based on the following indicators that I use, I'd like to assume the current rising wave is over (even if IBD has not declared market correction yet).
1. There were a few distribution days as noted by IBD's change of outlook to market under pressure.
2. Overbought indicators at the intermediate term: MS of SPX is over 80 and the Delta of my long IWM strike had reached 85 a few days ago.
3. The leading indicator I used for this wave is EEM and it's technically damaged (though it has not fallen below the long term uptrend line yet.

So only time will tell if the closure is too early or not. I closed all of my bullish postion trades this morning.

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Created with ProphetCharts®

Review of Feb Option Trade Adjustments

The Feb high probability income option trade cycle lasted about 7 weeks, with multiple adjustment fighting a up trending market. It's apparent that after each adjustment, the profitable zone became narrower and narrower as shown in the image below. The color codes were explained in a prior post.

In this period, I was expecting a bigger pullback which never occurred. At the time of this review, I'm thinking whether it makes sense to adjust to a more neutral Delta for each adjustment if the adjustment is following the current market trend.

Closing of IWM Bull Diagonal Call Spread

After 2 months into the bull call spread, the long Delta has risen from 0.65 to 0.85. The short call had been rolled up a couple of times. Now my target Delta is reached. The Market Sentiment (~85) is now in overbought area. The leading indicator I used when placing the trade was EEM/HAO. They have been pulled back more visibly from their charts.

My past experiences suggests a market pullback within 2 weeks are likely. But if market section rotation works successfully, the intermediate term uptrend will continue, creating profits for many other people.

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Created with ProphetCharts®

December to Feburary Trade Review

In the last 3 month, I had no chance to go through my formal trade review. Instead, I did a few brief analysis on the monthly trades, including the following:

• December butterfly trade review
• Jan paper portfolio analysis
• 4th quarter adjustment trade review
• Lessons from failed Jan paper trades

But as part of my trading process, it's still desirable for me to perform trading review monthly, based on my template for the review.

Trading Rules

• Adherence consistency

Difficult to tell. Probably not much consistency in this period. I adjusted my trading rules since late December. I also played with a couple of butterfly adjustment strategies in the 1st month or two.

• Skillful application/execution

Made an error using balanced butterfly adjustment for Jan paper portfolio.
Also need to refine inventory closing sequences as noted in Feb closing day.

• Monthly rule review/study

Did spend time at weekends to review/update trading rules. Started to incorporate the 40 day to 60 day option life after some study and paper trades.

Due to the susceptibility of making trading errors as evidenced in the past, I'm thinking of adding a validation function in my trading process. This validation step may cover review of adjustment strategy, and potential cancellation of strikes in existing position when new order is about to be placed.

Psychology

• Action during uncertainty

Not bad. Always used the Greeks and P&L chart to determine trades and adjustments.

• Risk Comfort ability/Adverse damage impact

Seemed to be more comfortable with risks undertaken by using current strategies and had better understanding that new risks would be acceptable when adjustments were made. It's a major charateristic of my trading system to use additional capital for adjustment which implies increased portfolio heat after adjustment. Must be comfortable to the overall risks during the trades to succeed in this system.

• Trade anxiety

Not much.

• Winning Altitude Development

Need to complete the 2nd part (integration of successful mind set) on the psychology of consistent winning altitude.

Trading Time

• Trading days

Using the 2 month-out options definitely reduced the amount of time required for trading in the last couple of months.  It should be possible to meet the 15 to 20 minutes per day on average target. But on a busy inventory closing day, it may take 45 minutes to over 1 hour to get all trades closed.

• Rest days

Did trading process related studies. Spent time on family and work as well.

Trades and Market Replay

• Market Forecast

Was expecting a market pullback of some sort, but not really happend. An overbought market can become even more overbought in strong trending markets.

• Trades and Adjustments

Did not appear to make major adjustment errors in the last couple of months. Used IC rolls first, then used calendars next. Whether enough Delta were adjusted in the strong market would be subject to further analysis.

To Do List

From this month onwards, I'd like to add a to-do-list as a reminder for my near term trading work.

• Integration of successful mind set to trading rules
• Identification of components of trading process
• What is learned from super trader Karen
• Quarterly Performance Analysis

Closure of all Feb income option inventories

Yesterday Morning, market fell down and offered me a fair opportunity to close all my option premium selling positions. With about 7 days to index expiration and a Gamma over -8 which was way above my estimated range around -2, I decided to take whatever market offered and close all remaining FEB positions to eliminate Gamma risk even though the Delta was in the comfortable zone.

The remaining positions were all RUT IC & Calendars. I had to rush to my other work and close them as soon as possible. So I entered the closing trades which were the opposite trades to the original open trades as usually. All trades which were 5 cents above mid-price were executed smoothly, except one double calendar trade. This tough-to-sell double calendar had a RUT Delta of -36, as market was falling quick at the time. I had to reduce my ask price a few times to sell it. Thus I was not able to catch all the profit shown in the above chart which was taken before I started closing position. It took me about 30 minutes to close all trades.

This let my think about an optimized closing sequence for the monthly option inventory liquidation day. In the closing time of such a day, I'll need to review the intraday market trend on a 15 minute chart. If the market is trending, then I should close the damaging trades first before I close the profiting trades.

Without this procedure, the trades with potential to more profits are most likely to be closed first and the trades with potential to more losses will end up remaining alive.

Exiting Feb High Probability Positions to reduce Delta

Today in the morning, market appeared to fight back from an early drop. I could not see a major sign of market retreat at the moment. My market neutral option portfolio has delta reaching over -50 again with a Gamma of 4. So I decided to trim down the Delta by closing the most damaged IC of SPX which is shown below.

The remaining Delta was about -37 which was still too high considering we are close to expiration. It's shown below. So I also closed the most damaged RUT IC position.

After these two adjustments, the portfolio Delta was reduced to -13 as shown below. I'll see how market plays out in the next couple of days to close all positions for this month cycle.

Exiting positions to reduce portfolio Delta

Yesterday, the markets rose after a short 2 day fall after the FED meeting. It appeared that the current FED is very market friendly and its announcements usually do not make market fall for long. It's still the same story of the FED announcements as I noticed before in my FED & VIX analysis. VIX made a significant drop as well.

In the mid-day, my monthly income portfolio had delta reaching a Delta of -74, with a Gamma of -4. The SPX iron condors were challenged on the upside.

So I had to make a Delta adjustment. With about 13 days to expiration, I had to close the most-damaged IC. The resultant portfolio Delta was -40. I'll close all positions by next Friday or close them early depending  on how market acts.