Saturday, March 21, 2015

What if GOOGL goes nowhere?!

Hello Traders,

I hope everybody is having as good a weekend as I am. I've been super busy during the work week, but I have still been able to get a few trades going in a couple of diversified strategies. I have been trading a mix of debit spreads, short puts, credit spreads and one trade that I will detail below, the Double Diagonal. I had honestly intended for this post to be more timely, but work is work, life is life. I'm in Guam, and I work during the day, so the market opens at 2300 and closes at 0600. Gotta get my beauty sleep.

Anyway, Here's the chart of GOOGL as of 20 March 2015, showing the upper and lower break even points for the Double Diagonal placed as described later in the article.

And here's how I put together the trade:

My April '15/May '15 615/635c525/505p Double Diagonal was placed on 6 March 2015 for a $.75 credit. My normal target for a trade like this would be 10% on the capital at risk, or $200 per 1 contract on the trade as placed above. However, I currently have a limit order to close the trade at $2.25 net credit, or 7.5% on risk capital or $150 per 1 contract. I'm taking less than normal in an effort to exit the trade as soon as possible.
My last 2 Diagonals, one in RUT and one in PCLN were closed for 10% gain on capital after about 25 days and much sweat. I would love to be in GOOGL for less than 20 days just to increase my probability of profit.
Here's the trade as it sits now:
The trade sitting at about $110 per contract profit now. I expect by the end of this coming week to be able to close for my 7.5% on risk target. The current Theta is $9, so if volatility does not decrease by more than 1%, I should be out on Thursday. If the implied volatility in GOOGL increases it will be sooner as the Vega is $15.
Ok, how did I come upon this trade you might ask? I use these Double Diagonals on names that I would normally trade for a volatility crush on earnings with an Iron Condor. Implied volatility has a tendency to ramp in these names in the month prior to earnings as actual volatility decreases, as the stock will sometimes move less in anticipation of the coming earnings announcement.
So, since the Double Diagonal is a long Vega, or in other words a trade that benefits from an increase in implied volatility, I wait until about 5 or 6 weeks prior to earnings, and set the short strikes about 45 days out, with the long strikes on the next monthly cycle after the month in which the short strikes are placed.
The best range of implied volatility to put this trade on is between 20-25%. If the security that you choose is much lower than that, the short strikes will be too close together and your probability of profit will fall through the floor. The idea is to trap price action in between your short strikes as implied volatility ramps up though 30% while movement on the tape slows or virtually stops as the earnings announcement approaches.
One more thing. It does not matter whether the Double Diagonal is placed as a debit or a credit. The only thing that matters is that the profile of the trade looks as it does in the example above. Your max profit line at expiration must not drop below the zero line. Your short strikes should be close to 1 standard deviation in the short strike month.
I have successfully placed these trades in CMG, PCLN and GOOG (before the split). I have not had the time, but I am interested in backtesting the strategy on FB, TWTR and TSLA as they have very similar volatility profiles surrounding earnings and during the period in between.
Check out the Small Time Trader Facebook for the latest from those who have most influenced my trading.
If you have any questions, place them in the comments below, so everybody can see the exchange.
Good Luck trading in the next week and beyond!

Saturday, March 7, 2015

Is your system working?

Hello Traders,

One of the biggest mistakes that new traders make (I am included in this) when they begin trading is to find the one system to take all of the work out of trading, and have a simple money machine that is profitable and just let it run. When that doesn't happen over the first week or month, they will jump to the next system and the next as their account draws down to nothing.

What if you're a mid-level trader with some experience and your system that's been profitable for months goes 0 for 5, or 0 for 10 over a given period. This can cause one to question their entries, executions and indicators for one. It can also get one to question themselves which can be bad for confidence and continued profitability. I have heard the expression "If it ain't broke, don't fix it."

But what if it is broken. What if general market conditions change. Market conditions do change. Just like the weather. Markets can change in terms of trend, volatility and liquidity just to name a few.

While not wanting to fall into the trap of jumping ship on my system every time it doesn't work, I also believe in a concept that I have heard referred to as CIP, or continuous process improvement.

I am an aviation enthusiast, and one of the parallels between aviation and trading is that the indicators you choose, and how you have them set up is to the market how instruments in an aircraft are to a pilot. Back in the 20's and 30's radios became more a part of how aircraft were navigated from one point to another. Over time these systems improve, and with them the accuracy of navigation.

Over the last year or so, I've traded my favorite pairs on strictly a 4 hour chart, using the 200 period SMA as my trend filter, and Parabolic SAR as my entry signal. So in 2014, I was able to get my micro forex account from about $200 to about $310. Over the first two months in 2015, though I could have made better choices in my system, using my standard stops and entries, I experienced a drawdown back to $200, all while going 0 for 10. 10 straight losses. So I figured that it was time to rethink how I navigate the market.

My new system for 2015 is as follows:

  • Multiple time frame analysis instead of trading only on the 4 hour chart for simplicity. I look at Daily for the trend, 4H to look at impending signals, and 1H to enter the trade.
  • I felt that I needed to reduce noise in the trends that I was following, and using Heiken-Ashi candlesticks accomplishes this.
  • I was getting whipsawed in my entries using PSAR, so I switched to a MACD with the most basic settings to provide entry signals.
  • I use the most recent structural highs or lows for stops, and set my targets to twice that number in pips for a 2:1 reward to risk ratio. When I get halfway to the target, my stop is moved to breakeven.
Here are some examples of how it looks:

In addition to the rules above, I put in place a rule to counter one of the most frustrating experiences in forex that I'm sure I'm not alone in experiencing. I've done my analysis. I've reviewed the calendar for risk events. I'm going in the direction of the trend and all my signals in all of my time frames line up. And I just got stopped out for 50 pips literally one hour after placing the trade.
So from now on, I harbor no love for any direction. If I get stopped out in the same 4 hour bar as the trade is placed, I will immediately place a reverse trade on in the direction of the stop out using structure to define the new stop, and 2:1 reward to risk as the new target. The reason is that regardless of my analysis, I was clearly wrong. And I have no problem letting the market that just stopped me out provide me some positive pips to reduce my loss, as the market has just informed me of it's true direction. In the last month, this has worked more often then not allowing me to fight losing trades back to even.
The reason I wrote this is to have my own rules visible at a glance for the near term, but also if any of you that read this get something out of it, it is worth the time. If something is broke, identify it and make a correction. Instead of 10 losses in a row, I am profitable over the last two weeks, due to one good medium term trade, and I am fighting back to even with a good mix of wins and losses that I feel that I can improve.
Drop a line in the comment block below, and we'll have a conversation. The system above is my own way I look at the markets, not a recommendation by any stretch. But if you have any questions on how I use the above indicators to find entries, let's talk it out.
Checkout the Small Time Trader Facebook for the latest from those who have most influenced my trading adventure.
Good Luck in the week ahead,

Thursday, February 26, 2015

Flattening of Emotions AUD/USD

Hello Traders!

I haven't posted a currency trade in a while, so here's what I have going on...

I just went long the Aussie against the US dollar at about .7873.

I had been looking for weakness and a break below .7835, and was in fact short before the London open. When I saw that I was clearly wrong directionally on the break to the upside at .7860, I reversed fields, positioning for a break above .79 on anticipated continuing upward momentum.

So, long AUD/USD at .7873, stop is .7835 and limit is 80.0.
I posted this trade as noteworthy because I find that I am notorious for digging in my heels based on what I want instead of clearly taking in what the market is trying to show me. Even if the trade fails later due to market conditions, I feel as if it is a victory to disconnect from what I feel should be and trade what I see.
Check out the Small Time Trader Facebook for the latest on those who influence my trading the most.
Leave a comment if you find the content interesting. Don't forget to share, and +1!
Good luck in your own trades!
P.S. I had to add that I was able to close the long for a modest 8 pips as AUD/USD reversed again!
Here's to staying nimble! I was intending to catch a rise in Aussie on low vol in complacent markets. Perhaps I should have written about my short EUR/GBP trade. More on that later...

Thursday, February 19, 2015

2015 in Full Swing! SPY SPX GLD TLT

Good Morning Traders!

I've been busy with work and other things, and have not been able to post as I trade. I've got a couple of minutes before I grab some sleep to catch up on a few things for those of you that are interested. I also like to post to organize my thoughts a little, and later to be able to take a big picture view of the portfolio and the trades as a whole. This usually ends up as: "What the !@#$ was I thinking!". But every once in a while I make some money.

So, When the VIX was last at 20 just before Feb '15 expiration, I sold a 2 standard deviation strangle in SPY for $.65 net credit about 55 days to March 31q '15 expiration at 217c/167p.


I was kicking myself the next day, as the trade could be sold for $.80, but now after a couple of weeks I'm back to even at about $.67. As you can see by the above charts, I was able to get a pretty fair credit, and my short strikes literally don't even show on the chart. I am most in danger (As I always have been, and probably always will be) on the call side. The S&P 500 has had a propensity at times to grind inexorably higher regardless of market fundamentals sometimes for weeks, slowly but surely running over call strikes like lava from that volcano on the Big Island in Hawaii that overran that unfortunate town. On this trade, I'm still in the game.

In my previous post on the S&P 500, I had purchased a butterfly below market hoping to capitalize on continuing volatility that never materialized. What a surprise. I was going to roll right in to March expiration with the same butterfly the next day, but I got cold feet and thought; One, the market is going higher from here, and I don't want my butterfly left out in the cold. Two, I thought that there might be a better way to manage my directional exposure based on my TLT butterfly. More on that later. I held off on my March butterfly until last night.

To maximize my Theta in the middle of the butterfly, I decided to leg in. I bought to open the SPX March 20 '15 2075/2025 put debit spread for $11.00. I did this because volatility is lower than it has been in the whole of 2015. Also, if I'm successful, and the SPX trades towards the 2025 level in the next week or so, I can get a lot more credit for the lower half of the put butterfly, and could possibly lock in a profit, and take risk completely off the table. If we bounce off the 50 day MA when/if there is a decline I may decide to close for whatever profit there is at the time, sans butterfly.

In my previous post on GLD, I had gone long with a Sep'15 call at 122, reducing my basis on the call by selling the 122/112 Sep '15 put spread.

As you can see, my entry was horribly mistimed. Though because duration is my friend on this one, and I am still above trend as GLD looks to be putting in a higher low, this is in the danger zone for the following reasons. I can be put 100 shares of GLD per short contract at 122 at any time. GLD can very likely continue lower. I am close to stopping myself out on this one, as I can still salvage 50% of my capital. On the positive side, 7 out of 10 of the days that GLD traded above 10 million shares after gapping up from 119 were on green days as GLD works to build a higher low after this pretty convincing rejection from 125.

In my previous post on TLT, I discussed how my would be victory spread was blown up by having been exercised on short calls that were In The Money when TLT peaked at 138. Though not a revenge trade, I went back into TLT as soon as I could short at 135 with a long put, because my thesis had not changed. If TLT is extremely overbought at 135, it was even more so at 138. Anyway, being in hind sight correct about the direction of TLT, and having a nice profit on my long 135 put, I turned my exposure to a butterfly to take advantage of the elevated volatility in TLT to sell some premium.


I'm sitting pretty with the TLT butterfly having locked in $1.69. I would love for TLT to rise in the next couple of days to the 130 level. I have a limit order to sell at 1.65 net credit, or double per contract over my locked in profit, of which I have no doubt will be filled if TLT can rise above 130 again.

In closing, I'm net short stocks, neutral to bullish Bonds and long gold.

Wow! That's quite a bit to catch up on, but there's where I stand going in to March. I'm working hard to recover from my OVX fiasco, which were two big complete 100% losers caused by trading in a product that had no liquidity in an underlying that I have very little knowledge of, going through it's most INSANE period in the better part of a decade. Lesson learned.

Good luck in your own trading, and please leave comments or questions here or on the Small Time Trader Facebook.


Saturday, February 7, 2015

Taking advantage of overbought bonds. TLT

Good Morning Traders!

Last week I got exercised on some calls that I had sold short as part of a spread in the TLT on a thesis that bonds were overbought and would soon be coming down to earth. The particular structure I had chosen was a 50/50 bet as far as probability of profit, which based on the extreme overbought levels was a risk I wanted to take. That position would have been profitable again at the end of last week, but no regrets. I must move on.

I still felt the same way when I was covering the TLT shares that I was assigned last week, but I didn't want to expose myself to the level of risk as my last "victory spread". I still have no idea why they call it that. Anyway, I decided to dip my toe back in by going long the March '15 monthly TLT 135 put for $3.00 net debit, when the TLT was about 135. I entered this net debit with the following plan for exit and/or expansion. I put in an alert for TLT at 138 on the high side, and 131 on the low side. The 138 alert, which would've been my stop, as the short term decline would've been invalidated by the rise of TLT above 138. And the 131 alert which would be my catalyst too turn my long TLT 135 puts into a butterfly, and locking a profit into the trade.

I was fortunate enough to get TLT close enough to 131 after the release of the Friday jobs number to sell the 131/127 Mar '15 put 2:1 ratio spread for 4.69 credit.

What that means is that I now have the 135/131/127 TLT Mar '15 put Butterfly on for a $1.69 credit which is also my max risk.

 In other words, baring any early exercise/assignment of any of the options involved in the spread, I will make at least $1.69 credit no matter what TLT does.

I will update this trade on the Small Time Trader Facebook.

Feel free to drop comments or questions. I love a good conversation. Let me know what works for You!

Good Luck trading!