KD or the Retail Trader? (Part 1)

Motivation for this post is an e-mail I received from “NS” expressing interest in working together to develop trading strategies. You be the judge as to whether the ultimate takeaway is particular to KD or a statement about retail traders in general.

I introduced KD in the second-to-last paragraph here. As part of his offerings, he created a “strategy collaboration spreadsheet.” This is a networking tool for anyone interested in working with others to develop trading strategies.

Collaboration has been discussed many times in this blog (i.e. here, here, here, and here).

The e-mail I received from NS reads:

     > Hi Mark,
     >
     > I am a father of 3, Husband, CEO, Systematic trading enthusiast. Traded
     > stocks discretionary for 12 years, have been trading stocks systematically
     > for 1yr Looking for a partner to join forces for accountability and
     > collaboration to complete new strategies. What is your availability for
     > an introduction meeting?
     >
     > [corporate signature]

While I continue to search for collaboration, I got an ominous feeling from this e-mail. Kudos to NS for introducing himself and providing some personal background. I just didn’t know how he found me. I have been away from the KD world for over a year. Did he read my blog and message me through the website? Was he someone I contacted in the distant past? Did he get my name from a third party? NS’s e-mail felt totally out of the blue.

After some deliberation, I responded:

     > Hi NS,
     >
     > How did you get referred to me?
     >
     > Thanks,
     > Mark

This ends in a very interesting way, which I will get back to later.

When I purchased KD’s “Y” (a brand name that will remain masked), I added my name to the collaboration spreadsheet and started e-mailing people. Over the course of 4+ months, I reached out to 12 people from the spreadsheet. For those who did not respond at first, I sent a follow-up two weeks later “in case they missed” the original. This was my message:

     > Hi X,
     >
     > I am contacting you from the Y collaboration spreadsheet. I’m
     > looking for someone with whom to exchange ideas, feedback,
     > impressions, test strategies, etc.
     >
     > I hope you’re making it through this COVID-19 crisis okay!
     >
     > Thanks,
     > Mark

The difference between my e-mail and the one I received from NS is mention of Y. Y should be easily recognizable because everyone paid a lot of money to get it. This makes us a shared community. Y should provide for a warm lead—at least warm enough to warrant a short response from those not interested and/or an explanation of why (since they did voluntarily add their name to the spreadsheet in the first place). Nobody owes that to me, of course, but for some I tend to think “common courtesy” would include it.

How exactly did I fare with my outreach attempts?

I will continue next time.

2018 Incident Report (Part 6)

I’ve been getting more organized this year by converting incomplete drafts into finished blog posts. Today I conclude a July 2019 draft reviewing my 2018 trading performance.

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When I’m not making money it feels terrible: no doubt about that. I feel like a failure, like I should go back to work pharmacy, etc. I want a better way although I should not look to throw the baby out with the bathwater. If the worst I ever do in a year is lose 5 – 10% then on the whole I’m going to be a star and I have to remember that.

Perhaps never do I feel more on-edge than when I am out of the market with uncertainty over when to get back in. The volatility train does not arrive often and when it does it usually makes for a short stay. I hate to be on the sidelines when the train leaves the station, which is why I am so quick to jump back in after making a large exit.

I need a better way. I need to backtest something with a sufficiently large sample size in which I can believe. Otherwise, I will feel like this is mere gambling.

A couple other thoughts for exit strategy include:

• Close partial positions when I am down one month’s usual income
• Start selling the call side when down one month’s usual income to better hedge against downturns (but how will that fare in rising markets?).
• Switch to a symmetric, BWB, or verticals instead of NPs. On this point, I could go back to the idea of selling $0.30 on a $5 spread to make 6% per month or 72% per year. If I allocate only 20% of the portfolio then that is 14.4% per year with no possibility of losing more than 20% in a month. That’s still not a great deal risk/reward ratio, though.

Here’s one more batch of random thoughts:

     > Part of my problem this year had to do with anchoring and greed.
     > I started the year making good money in Jan. I then lost much
     > more (quickly) in Feb. From the time that I got back in
     > (slowly), I worked several months to catch up through Oct when
     > I was up ~10%. I knew it wouldn’t be my usual good year (or
     > maybe I was just comparing to +36% last year) so I was
     > patient… and then probably dead-set on holding longer and
     > hoping the market would stay up—until it didn’t. I had a
     > decent idea to get out if my YTD gains evaporated (first chance
     > to get out when market went into backwardation was Oct
     > when I was still up 4 – 5%). I was then too eager to start
     > getting back in at first glance of normalcy. After a couple
     > days of contango, I re-entered and then lost more. Sporadic
     > trades thereafter lost as well. By the time I truly called
     > it a year on Dec 20, I was down close to 10% (of my initial
     > 2018 equity value; this would be more than 10% of my initial
     > 2017 equity value on which the +36% is calculated).
     >
     > Going forward, I must work on developing rules and sticking
     > with them no matter what. Sticking to the plan must be
     > everything. One way or another, I’m going to be
     > frustrated when the market goes against me. I might as well
     > be frustrated knowing that I at least followed my rules
     > because the alternative to following rules is to hope.
     > If all I have is hope and I lose more because of it—which
     > has happened with every major loss I have suffered to
     > date—then I’m going to feel even worse and kicking myself
     > back to the drawing board like I am right now.

2018 Incident Report (Part 5)

Once again, today I continue with an unfinished July 2019 draft evaluating my 2018 trading performance.

—————————

With regard to getting out, I wrote to colleague FM:

     > As I said, I want to be out when the market gets volatile because
     > all of the largest market crashes have been preceded by some sort
     > of craziness. The trick is getting out too soon or too late and
     > there is no magic bullet that will work for all occurrences. In
     > general, though, “craziness” involves wide market swings, regular
     > 1+ SD moves, longer-term moving averages being pierced to the
     > downside, VIX levels breaking through resistance, etc.
     >
     > I had a mental stop at YTD profits for my account. Once those
     > evaporated I got out—and in retrospect, I’m glad I did because had
     > I not then I certainly would have the very next day with much
     > bigger losses.
     >
     > …I know you got frustrated previously seeing $307K go down to
     > $251K so I closed [those] positions… to preserve some gains.
     >
     > With a sliver of [the] portfolio invested in NPs, one could make the
     > case for me to keep trading [the] account per usual. The benefit of
     > getting out would be to prevent even [that] sliver from incurring the
     > biggest losses because at some point, there will probably be a major
     > market crash on the order of 20%, 30%, or more. Trading this way,
     > I can probably avoid those excess losses. The right answer is
     > only knowable in retrospect.

Colleague FM responded:

     > Your response is consistent with prior concerns about managing
     > volatility. The backtest through 2008 seemed to produce very good
     > results and I am not sure why volatility this year would be especially
     > concerning.
     >
     > Regardless, much of your trading is based on how you feel about the
     > market; which is not atypical of traders. However, if you are trying
     > to sell a methodical, long term process, you will have a hard time
     > as there is not a definable structure.

I’m actually trading larger and with more variable capital than done in the backtest. This may be part of the problem.

If I were just trading OPM then I would commit to trading consistently and regularly. I might have to stop trading my own money, though. I might also have to somehow separate myself from the client. Talking about this in times of market turmoil puts me even more on-edge since I always want to be cautious, qualify what I say, and not be too arrogant so as to be subsequently bitten in the behind due to excessive hubris.

I will conclude with my next post.

2018 Incident Report (Part 4)

Today I continue with an unfinished July 2019 draft evaluating my 2018 trading performance.

—————————

Other considerations regarding the problematic strategy include:

• When to get the calls involved?
• Make some sort of checklist and record data daily. Take preventative action no matter what. Consider limiting position size so I always have some powder dry (have I been trading too large? Or keep trading this size but don’t change for a while). Checklist should have a number of items and the decision whether to take corrective action should depend on total checklist score (this will be too subjective for backtesting especially given limited number of occurrences of significant corrections per third paragraph here).
• When I roll, I’m starting at a much greater price (e.g. $12 – $14), which has a much higher delta. If the market continues to trend from that point, then those options quickly become $20 – $30. This makes me horribly uncomfortable. Until I find something better, exiting at first instance is a better choice than rolling.
• I want to test taking significant action on the biggest losses in X days. Looking over the whole set and making this decision is committing a future leak. However, plotting the difference across a range of X (e.g. 5 – 100 by increments of 5) or maybe a WF approach using largest in the last two months seems interesting [are both approaches the same? Even with a WF approach I have to figure a way to determine X].

With regard to my trading on Oct 24-25, 2018:

• I’d like to talk a bit about my trading mistake from Wednesday where I said to myself, “I’ll just go ahead and sell [harmlessly] an $8 call to recoup some of my losses.” When the market retraced half its huge Wednesday decline on Thursday, I felt horrible looking at a $20 call. I got little help from volatility despite VIX being down two points. A better way to approach this might be to look at the projected option price with the market retracing at least to the opening (high) price from Wednesday and to assess my risk tolerance. Another possibility is taking a 15-60-minute break from monitoring positions. While I risk seeing a horrifying DD when I return, I seem to pick the extreme in too many cases (e.g. closing the call on Thursday around 3 PM only to see SPX give back 10 of its 60 positive points into the close).
• I am not convinced TA is any better than 50/50. What it can do, though, is put some definition around what I’m doing such that my trades are consistent. Maybe I only go long (short) into an overbought RSI. Maybe I only go long (short) when I see a confirmed close above a previous candle’s high (low). At least this avoids me looking at the market, freaking out, and chasing only to watch (a short time later) my decision be proven horribly wrong after a reversal. This aligns with Goal #3 that I have discussed previously.
• It’s sloppy trading when I am forced to trade in fast-moving, wide markets and cave in huge amounts of money to get filled (especially when, two minutes later, I see the fill could have been had for a much better price).

I will continue next time.

2018 Incident Report (Part 3)

Today I continue with an unfinished July 2019 draft evaluating my 2018 trading performance.

—————————

These possibilities aside, one thing I can do is have a system for when I get into trades and when I stay out. Maybe I use something like the STFS and never enter when the trend is going against me. Maybe I use a simple pivot system and only enter long (short) at a buy (sell) signal. Maybe I watch the price for a time period and enter a limit order that seems reasonable based on recent trading activity. While none of these ideas will guarantee I get better fills, they would all provide some objective framework to follow. If nothing else, at the end of a trading session I could say “I followed my plan.” Ultimately, that may be the most important thing anyway.

Related to Goal #3 is a thought I’ve had about day trading futures. This would give me extended face time with the market and help me to become more comfortable watching. Trading futures can also hedge my option portfolio if I am trading the trend while having theta positive option positions in place.

Trading futures may also help me find some “co-workers.” I’ve had one heck of a time finding serious option traders around. I might fare better finding futures day traders since “day trading” seems to be a stronger buzzword than “options.”

In addition to having a defined approach, all of the above would require me to spend more time looking at the market. This brings me back to Goals #1 and #2 described previously.

With regard to the worst sales pitch ever, here are some ideas I have for potential trade indicators:

1. IV % increase (consider closing if IV has increased 30-50% when the position is losing money)
2. Option price (regardless of M/S, I’ve found level of comfort and strength of discipline to be inversely proportional to option price. Delta may be a confounding variable as higher-priced options move faster in terms of gross amount)
3. Distance OTM (some efficient frontier exists between moneyness and days to expiration. This may be hard to define but I know it exists)
4. Number of contracts (I dare not call this “position size” since other things play into the latter like notional risk, PMR, etc. I may look to change my trading to a fixed number of contracts per month rather than a dynamic approach where I trade every day despite the DD improvements enjoyed by the latter from time diversification. PMR is proportional to number of contracts)
5. ATM IV:10-delta IV (the idea here is to take note of vertical skew. A steeper skew may or may not be the time for me to be in the market: need further testing. Another approach could be to monitor delta X% OTM. This would change with DTE. I may have 12 data points per year, however, and it might [not] be useful to determine a percentile rank for where the current ordered pair fits into the whole distribution)
6. Technical analysis. While I won’t believe in untested strategies, I may be able to specify criteria for entry, to stay out, to add new positions, or to sit on my hands. Things to watch could include trend direction (e.g. 8/34 crossover, price closing above/below 5/20/200-SMA, slope of 50-SMA), $TICK strong or weak (tags of +/- 1000), etc.

I will continue next time.

2018 Incident Report (Part 2)

I left off reviewing my 2018 trading performance (originally written June 2019). This is part of my year-long quest to get more organized by converting incomplete drafts into finished blog posts.

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Part 1 concluded with three goals for the coming year.

#1 addresses the observation that I really don’t like looking at the market. My style of trading has generally been “no news is good news” even though news has so little to do with any of it (see paragraph below excerpt here). When I get around to checking the market (and subsequently trading), I sometimes notice holding my breath before the visuals display on the screen with a subsequent sigh of relief when I realize things are under control.

Filled with trepidation is not exactly the way I want to approach my job on an everyday basis. I think the worst sales pitch ever has something to do with that concern. I would much rather look at the market with anticipation, calm assurance, collectedness and confidence, peace, security, contentment, and serenity: choose a synonym.

Goal #2 addresses the fact that I typically check the market once daily. I should look more often especially if I get into more frequent trading like Weeklys (I have seen both positive and negative reviews).

Goal #3 pertains to a feeling that I usually end up getting bad fills. A bad fill is when I pay $3.00 for something only to see it cost $2.60 a few seconds later. Reasons exist for this sort of thing to happen (e.g. displayed bid/ask shrinking when someone actually places an order, market makers wanting to transact toward their side of the natural to realize bigger margins, etc.). The only way I can ensure this does not happen is to place an order for an advantageous price and then wait for a fill.

Goal #3 is related to #2 because I can’t always accomplish this by popping in and out once to check the market. I may have to sit with the market, watch the chart, perhaps work the trade, etc.

I have a couple ideas as to how to achieve #3. One possibility is to create trading strategies that give me leeway to pick up my bat and ball and come back another day when conditions are more advantageous. Another possibility is to only enter trades that would be down money right now if placed on a previous day (or bar). If the backtest as a whole looks good, then I would think being more selective and getting more advantageous entries should be added benefit. The drawback would be a [small?] percentage of trades that would have posted zero MAE. Missing out on these trades may lower my overall average profit.

I will continue next time.

2018 Incident Report (Part 1)

I have been getting more organized this year by converting incomplete drafts into finished blog posts. Completing this draft made me realize I was overdue for a performance report.

As it turns out, I had a never-completed mini-series from July 2019 about my 2018 performance.

—————————

Originally, this was supposed to be an incident report of major losses suffered the week of October 8, 2018. Now, it’s going to be an incident report for all of 2018.

After having my best year ever in 2017, 2018 was decisively my worst (including 2008 when I actually made money). I took big losses in February, October, and into December.

One of the biggest sources of both frustration and optimism is that whenever I experience big losses, I always seem to be able to look back to a point where I can easily say “I should have gotten out” and avoided the worst. The big question is whether these points are visible prospectively. Anything knowable only in hindsight is mirage and not a useful indicator.

I feel like I need to do a few different things every day to maintain trading preparedness.

First and foremost, I need to develop a checklist with daily monitoring parameters. I will take pre-planned action when triggers get hit. The main focus of my trading will then be to follow the checklist: no questions asked.

I had a monitoring spreadsheet created this year for naked puts. I stopped using it once I closed partial positions. My discipline waned throughout the remainder of the year. This needs to be iron clad throughout. Discipline, in the trading business, may be said to be everything.

One repetitive theme I have noticed about myself is that when I stop the bleeding, I rarely stop the bleeding. If I use some sort of equity stop-loss or [set of] indicators to determine whether I am in [for at least a percentage of my standard size] or out of the market [entirely], then that needs to be it. I always seem to fear the whipsaw. I fear being out when the market suddenly reverses thereby leaving me on the sidelines. This fear has not helped because time and time again, I have maintained a partial position that proceeded to aggravate my losses.

Here are three things to work on for the coming year:

1. I need to feel comfortable in the markets.
2. I need to look at the markets more.
3. I need to have an approach to trading when I actually trade.

I will discuss these further next time.

In Need of Performance Update

One of my blog projects for the year is to get more organized by converting drafts to completed posts.

With a bit more work, incomplete drafts can become completed posts. Entering this year, I had over 30 entries in the “drafts” folder—some in excess of 450 words, which is my usual target. Completing these long drafts is a major coup because for less than the time it takes me to finish one from scratch, I can easily generate two, three, or even four complete posts.

With regard to these drafts, I typically write something like:

     > In the longshot case that someone out there could possibly benefit
     > from any of this, what follows is this post from August 2018.

Some of the drafts are well thought out, but I honestly have no idea where they fit. Some are without reference links to guide me. Some (like this one) are excessively complex and hard for me to decipher. I have no excuse for the latter except poor writing, quite honestly. Because they are just drafts I’m looking to complete, I include them and leave the decryption to you.

What follows is especially “in case someone out there could possibly benefit” content. Although it reminds me that a performance update is overdue, I am not sure what six-year period is being described. Perhaps when I go back and calculate performance, I will be able to resolve what follows. This post is therefore a call to action as stated in the title.

—————————

Keep in mind that my performance during said six year window, as discussed last time, was disappointing. However, showing performance since I started trading full-time provides evidence that I have done well overall. I believe the approach I have used recently is more disciplined, systematic, and therefore better than what I did in the early years of 2010 – 2014.

Then again, my stated 2010 – 2014 performance is not exactly bad. The high standard deviation (SD) hurts but that SD is to the upside. Upside SD will not cause sleepless nights, which is why a separate statistic differentiates upside from downside variance (Sortino Ratio). My 2012 return in excess of 50% is a major contributor to the high SD, which leaves risk-adjusted return much to be desired. Realistically speaking, though, clients would never complain about that.

Also with regard to multiplicative versus additive, what shocked me was to see a 10% improvement on the RAR ratio amounting to only 79 basis points. The problem with RAR is that it is unitless. 79 basis points is not 79 basis points, either. From 10% to 10.79% is only a 7.9% improvement whereas from 5% to 5.79% is a 15.8% improvement. When thinking in terms of management fee and overall compounded returns, we think about the additive difference.

The Case for Withholding Performance Reports (Part 2)

Today I continue discussion of an argument in favor of opacity surrounding performance reporting.

I recently spoke with a trader “E” who cited a performance claim he believed to be credible from an investor he had been speaking with over a long period of time. In E’s mind, the long time interval was sufficient to establish the investor’s credibility. E remembered an earlier date when the investor made a buy call for an [allegedly] substantial position. The stock went on to do extremely well.

I think E is probably right about this specific example but in my experience, the example is unusual. I meet people in forums, Meetups, or investor shows, and they boast about performance or big wins. These aren’t people I have known for a long time nor are they people who have given me specific market calls (which I would never ask for, anyway). Stories aplenty exist about social media profiles of “investors” who make various buy/sell calls over time. Most of these do poorly. Every now and then—if only by chance alone—one does well and that profile gets all the press.

I will point out one important caveat with regard to E’s example: without brokerage statements and/or tax returns, E really has no idea how “substantial” the position is. Position size is important with regard to performance because the smaller the position, the more willing one may be to gamble on a trade. From a marketing perspective, I should tell many strangers about new positions: if wrong then I look human and if right then I look like a hero. E may be experiencing the latter.

I will conclude by addressing a potential contradiction mentioned in the footnote to my previous post. I said I would feel more comfortable reporting performance to people with whom I have an “advance degree of trust.” At the same time, I go ahead and report performance here. This blog is primarily to keep me on track with projects. I do not advertise this blog. I do not market this blog. I occasionally view the analytics and I know very few people read this blog. It’s therefore not the case that I share performance with large numbers of strangers (and certainly not in a timely manner).

It would appear that my previous dilemma over whether to organize a free and transparent Meetup has run into another dilemma over performance reporting. Sir Walter Scott’s quote is quite fitting here: “oh what a tangled web we weave when we first practice to deceive.”

The Case for Withholding Performance Reports (Part 1)

I am surprised to see myself defending opacity in the financial industry.

One of the things the industry routinely avoids is accurate performance reporting. I did an extensive review on the subject earlier this year. The upshot is that most potential clients fail to demand accountability by demanding such reports, that the opacity is likely self-serving for the industry, and that transparency might lead to compliance issues.

Unlike my shock and awe when doing the research, I found myself at least neutral if not favoring opacity when writing this recent post. More is to be said about performance than just the numbers alone. No matter how my results look, for example, the additional context would be downright scary. Consequently, I would feel more comfortable sharing with those I trust than with complete strangers.*

This concept is indirectly affirmed by S12 E15 of CNBC’s “American Greed.” As part of his fraudulent pitch, Ephren Taylor promised one plaintiff an annual return of 66% on a “riskless investment.” Taylor fits under the “worst-case scenario” umbrella along with Madoff and others profiled on the show. But even on much smaller orders of magnitude, I question whether performance claims are ever trustworthy when compliance is not onboard to ensure accuracy.

Performance is one of the most powerful tools con-artists use to defraud people. Promises of unrealistic returns hit the uneducated in arguably their most vulnerable spot. Fraud runs rampant in this industry where people are literally handing over money [with the hopes of investing but all too often with the result of getting robbed].

Because I never know who I’m dealing with when making new connections, I prefer to keep performance out of the discussion. It might be relevant if presented correctly, but the numbers are misleading often enough to necessitate scrutiny as a means to establish validity. I therefore don’t feel comfortable believing performance claims I hear from others and I don’t think they should either. It’s a cautious and maybe even pessimistic approach but I honestly credit an ability to avoid the lofty sales pitch as one of the keys to surviving 10+ years as a full-time trader.

In contrast to baseless claims, I would believe performance numbers generated from GIPS compliance and verification. This is precisely the sort of expense retail investors do not undertake.

* I will resolve a related contradiction next time.