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This week was rough for me

I got my ass kicked this week by the market.

It started early in the week, when I bought WORK and SPCE call options, just before the market reversed course on Monday and sold off in the final hours of the day. Because the SPCE options expired on Friday of the same week, I had no choice to cut this loser. Only to see it rip higher Thursday and Friday.

I started the week in a hole, down $1,100.

I spent the rest of the week trying to climb out of the hole, only to make the situation worse. End result, down $4,000 on the week.

How did this happen?

Getting in a hole sucks. Spending the rest of the time trying to climb out of the hole led me to making sloppy trades, overtrading, and putting on trades that I wouldn’t normally make on SPY and IWM that I told myself were “hedges” in case the market sold again.

I forgot what was working.

I forgot how I made $12,000 in a matter of weeks from May 27th to June 19th.

Nothing seemed to work.

Every trade went against me as soon as I entered it. Or so I thought.

Either way, it doesn’t matter what they did.

What did matter was my mindset sucked. I was in a bad mental state, and desperately tried to “undo” my bad trades from the early part of the week, only to have even more bad trades to “undo”.

I wasn’t doing what works for me.

I started trading options expiring this week. I started day trading more even though I very much prefer swing trading a position for 1-2 weeks.

I cut winners too soon (primarily due to short-dated options being traded).

I let losers run on too long.

I added to losing positions.

I put on positions that were not favorable from the get go.

I spent too much time this week hoping for my positions to go in my favor.

Now is a time for reflection

It’s the weekend. My trading week sucked. But I still live to trade another day.

Goal #1 and always: DON’T LOSE ALL YOUR MONEY. When the money is gone, the game is over.

I’m going to take this weekend to reflect on my trades. I will review past trades further and understand what happened and why it happened. I will try to understand what my mental state was when I entered into those trades.

Trading is hard. It’s hard to tell by all the so-called experts all over social media. They’d have you believe they make profits all day. You rarely see is the hard part of trading. The part where it beats the shit out of you and makes you question why you started in the first place.

I share this for anyone else who had a bad day, week, month, or year. It’s not easy. It’s not supposed to be easy. I knew that. You know that. So take time to reflect, take care of yourself, and objectively review those trades and improve the process. It’s the only thing I know how to do.

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I’m sorry for anybody shorting this market

This is a difficult market to get a read on, that’s for sure.

Shorting the market right now is a fool’s errand. Whether you believe liquidity from the Fed is driving the market higher or not doesn’t matter.

The market wants to go higher. That’s where the path of least resistance continues to be at the moment.

Selloffs are very few and far between. You have to be tactical and quick with any shorts in this market. They can payoff, as they did for me on Thursday and part of Friday. But they stop working very quickly.

We are all waiting for the next big selloff. It may come. It may not. For that reason you have to be careful until we get there.

I learned my lesson last year

I got burned time after time shorting the market for the larger part of 2019.

I was focused on fundamentals, trade war headlines, and a seemingly deteriorating market.

So I shorted consistently all of last year. I came very close to blowing up actually. I was down 80% at one point.

It wasn’t until March of this year that my short positions paid of very handsomely and actually got me back to even despite the horrible 2019 year.

In recent weeks my trading has improved

I’m more focused on what VVIX and VIX are telling me in terms of volatility. If I believe these are trending higher, then I’m going to be biased to mix in long and short trades to capitalize on a move in either direction.

However, if VVIX and VIX are trending lower, them I’m biased to hold a majority of my positions long in the market, depending on what is moving on that given day. In recent weeks, I’ve been able to make good plays on the likes of XLF, GS, JPM, BA, UAL, RCL, CCL, F, TSLA, XOM, AMD, NVDA, VIAC just to name a few.

Take profits and cut losers

I like to play options that are 2-4 weeks away from their expiration date. Weekly options (5 or less days to expiration) are too risky for my style right now. I like to give my options a little breathing room.

I watch my positions like a hawk. When I begin getting down 20% I seriously have to consider cutting this position and taking a loss. Once I’m down 40% I cut it no questions asked.

I also try to take profits on 50% of the position around a 10% gain (or more if it’s there). Then I take off another 25% around a 20% gain (or more). The I leave the final 25% of my position to run to see how far it can go.

Last week I had a SPY put option that I let run, that went from $90 to $630 in a matter of days. In the past, I would have never let it go that far because I would’ve booked all of my profits too soon. But because I had already closed out 80% of the position at a gain, that last contract I was holding was essentially risk-free and I had no problems holding it for a little longer.

If you want to learn more about trading psychology, I highly recommend you check out my notes on Trading in the Zone by Mark Douglas.

Been playing lotto calls on big movers…

This market is insane. For that reason, I’ve been playing short-term call options on those names getting bid the most recently.

Banks, airlines, cruise lines, oil, casinos, retailers, are all industries I’ve dipped into and out of recently. I’ve traded it on short-term call options about 3-7 weeks out.

My main focus is to take of 1/4 of a position at 10% profits, another 2/4 position at 20-30% profits, and then let the remainder of the position run. Taking profits is critical to setting up risk-free trades.

That’s the way it has to be played right now.

It’s very very very easy to adopt a bearish mindset right now.

The market is going insane.

But I’m thinking about it like the tech bubble.

My main focus is to keep my holdings short. I never held any of my lotto positions past 2 days unless it was the 1/4 winning position remaining.

It’s much much easier to let winners run when you booked 3/4 of your position at a profit. Those runners have ended up making up my big home runs in recent days.

My best trade was UAL last Friday, which I booked at 361% profit. F also netted me 192% profit.

I cut losers at around 20-40% drawdown on these positions without any regrets. It’s worked out well so far. But that can change very quickly.

I was wrong

A few weeks back I was dumb enough to think selling would return to this ridiculous stock market.

I want to catch the next downturn. I think we all do.

Downturns provide opportunities for large profits.

Volatility events have been some of my most profitable times. The hardest part with shorting any market is being patient and strategic.

My gauge to short flashed

I have a few different metrics I monitor to gauge when are better times to short than others.

They began flashing on May 11 and 12, and sirens were going off on the 13th and 14th.

On the morning of the 14th, the market miraculously recovered. I felt like OPEX and VIX expiration would loosen up this market. Alast I was wrong. But, I ended up minimizing my losses from this due to position management.

Position sizing and profit taking

This is why position sizing and profit taking are key to succeeding in overcoming your emotions in the face of an uncertain future.

On May 12, I put on 100 SPY July 17 puts at the $110 strike for $0.03 per contract, totaling $300 (small bet).

On May 13, I took off 20 contracts at $0.06, for a total of $120. That was a 100% profit from the previous days price. Now, my cost minus proceeds received from this sale is $180 ($300-$120).

On May 14, I took off 20 more contracts at $0.10, for a total of $200. That was a 233% profit from the previous days price. Now, if I take the $180 above, and take off the $200 here, my cost minus proceeds now equals -$20 ($300-$120-$200). This means my remaining position is risk-free.

Risk-free? No way…

Yes way. I had 60 contracts left that could literally expire worthless, and I would have still made a profit on the entire trade. This is why it’s important to take profits along the way on any position you’re playing

Turned out I was wrong. But I played my signals, managed around the situation, and came out with a small profit (which actually turned into a small loss because I later added to it…).

But…I ended up with a smaller loss because I managed around an unknown future. At times in the past, I would’ve ridden the entire trade from top to bottom and loss damn near my full investment.

The return of selling in the stock market

I believe we are about to see heavy selling in the market once again.

We have seen the return of some selling, with the S&P 500 down 4.7% this week as of my writing on May 14th.

Why do I believe this?

Coming into this week, I expected a calm week with usual options expiration (OPEX) week behavior. From my observations, market makers can usually move markets and control price action more strongly some weeks than other.

Market makers can influence markets especially in times when volume is low and volatility is low. This week, the market has seen more selling than usual during OPEX week from my experience.

Not only that, but we haven’t seen the drastic moves in the S&P futures contracts overnight. Last week, it felt like every day we were seeing moves higher after a day of selling off during regular trading hours.  See tweet below:

on moves 5-14-20

The last time I remember feeling like this during an OPEX week was for the trading week ended February 21, 2020 and we all remember what followed over the next month.

What are gamma levels saying?

On May 11, 2020 I noted that $2.2 bn in positive gamma was coming off books this opex Friday.

tweet 5-14-20

Now these options could have been rolled out or closed altogether. We never really know. But I expected much of this gamma exposure to be moved in a manner that would bring us closer to zero gamma.

With all the selling this week, gamma levels have now turned negative across the board according to spotgamma. This is not good if you are bullish equities right now.

spotgamme 5-14-20

While component gamma is still positive, per Squeezemetrics, and DIX signals that Dark Pools continue their buying binge, I can’t ignore headwinds that we are going to face in the next week or two.

squeeze 5-14-20

What headwinds are we faced with?

Will we see a second wave of infections?

What businesses are going to go out of business for good?

How many of the now 36 million lost jobs will actually be recovered?

What will be the recovery time of those lost jobs?

What kind of demand shocks are we in store for over the next year or two?

How far is the Fed willing to go with their monetary policies?

Will the Fed buy equities?

With all of these questions unanswered, it’s very difficult to be bullish right now.

We are all at the mercy of news trading algos

It’s become commonplace for news stories to drastically and instantly influence the movement of stock prices. This has become more observable in the past two years, with China trade deal news dominating headlines seemingly every day.

According to Larry Harris (Trading & Exchanges) there are four kinds of informed traders, with news traders exhibiting the second most influence on the market. According to Harris:

News traders collect and act upon new information about instrument values. They try to predict out instrument values will change, given new information. News traders try very hard to discover material information before other traders to.

Unlike value traders, news traders do not estimate the value of an instrument from first principles and all available data. Instead, they implicitly assume that current prices accurately reflect all information except their news.

It’s difficult trying to day trade or swing trade around the drastic changes in stock prices that are triggered from a single headline.

Many algorithms are programmed as news traders, which read news headlines or tweets and have some pre-programmed objective-based method of interpreting the sentiment of those headlines.

Algorithmic trading has been of much chagrin of people in Wall Street such as Jim Cramer. Earlier this fall, Cramer said the following about machine trading

Cramer blamed the errant jumps in the transport stocks on machine trading, calling the buying “robotic.”

“Real human buyers wouldn’t pay up eight points for FedEx on no news, unless they think there’s going to be some sort of takeover, which there probably isn’t. Real buyers work an order. They wait for sellers to come to them,” he said. “Instead, these machine buyers they blitzed all the sellers all the way up, and you have to believe they didn’t even attempt to try to get a good price for their customers.”

The dreary truth

We have to accept the fact that algorithmic trading is a part of the market as we know it.

As a day trader you will always at the mercy of algorithms suddenly going against your positions which makes day trading harder than it already is.

If you’re a swing trader, you can ride out the waves because news headline trading tends to smooth out over time (unless it’s something dramatic like a President Trump tweet tantrum).

So we must deal with it, must learn from it, and must learn how to trade with or around it. It’s up to you what you do.

You are your own worst enemy

It’s easy to blame others.

It’s hard to blame yourself.

It’s easy to blame things out of your control.

It’s hard to blame those things that are within your control.

Rules can help you make better decisions. Your goal should be to follow your rules. Not making money. Making money should be a product of following your rules.

Don’t think of yourself as a gamblin’ man. Think of yourself as a risk manager.

Make smarter bets through time. Don’t trade too big in any one position or in any one day. When you place your bets is just as important as where you place your bets.

How to download S&P 500 data from Yahoo Finance using Python

Make sure you have the yfinance package installed first. If you don’t, you can run the following command in your Jupyter notebook:

!pip install yfinance

Input:

import pandas as pd
import numpy as np
import yfinance as yf

Input:

spy_ohlc_df = yf.download('SPY', start='1993-02-01', end='2019-12-01')

Output:

[*********************100%***********************]  1 of 1 downloaded

Input:

spy_ohlc_df.head()

Output:

spy 12-1-19

Conclusion

This is a very brief summary of how you can download stock data information for the S&P 500 from Yahoo Finance, using the Python programming language. If there is something you want to learn about, please let me know in the comments below and I can cover it in a future blog post.

Did the Federal Reserve Kill the Volatility Trade?

On October 11, 2019, the Federal Reserve announced they would begin buying Treasury Bills in an effort to ensure there are “ample reserves” in the banking system through the end of the year.

fed treasury oct 11

On October 11, 2019, the Volatility Index (VIX) sat at 17.4. Today on November 26, 2019 the VIX has recently closed at 11.5. As you can see from below, it appears as though this not-QE program that is “organically” growing the Federal Reserve’s balance sheet has effectively killed the long VIX trade.

fed vix chart

The case made that supports this idea is that investors are engaging in more risk on behavior, because they are basing their decisions based on the Federal Reserve’s prior balance sheet expansion programs (QE 1-3).

Because the Fed is purchasing T-bills, they have eased some of the money market pressures. Liquidity in the market has proven to be a positive catalyst to the market.

Why do I believe this?

It can’t be the trade deal.

That’s the only other source that has been moving the markets higher according to many daily stock market new reporters. And I don’t believe these markets are pushing higher on hopes of a trade deal.

I think the Fed’s easy money policies have once again eased tensions. For now.

A lesson to me

This whole scenario has taught me a valuable lesson about position sizing. I’ve learned to not be so overconfident in my predictions.

Every trade made is a small bet. Each bet will abide by the Kelly criterion.

Never go all in.

Grow your money slowly and strategically.

Live to trade another day.

Read

Barton_options on Twitter has been a great resource for me to learn more about the Federal Reserve operations and how it relates to the Treasury and the overall economy.

He recently wrote about this in a newsletter you can read here.

This is what’s going to happen in the market this week

In this article, I’m going to review my past predictions and make some new ones.

On August 3rd, I wrote a post laying out what I thought would happen. Shall we take a look?

As I mentioned earlier, I expect IWM to pullback 5-7% since it broke the $153.50 support level earlier today.

IWM finished this week down 1.28%. I didn’t put a date on the 5-7% pullback, but this is something I expect to play out within the next two weeks.

This would give you a range of $144.95 all the way down to $141.90 coming into play.

At a minimum, I do believe that $145 will be retested. This is the level that IWM dropped to in May following the added tariff announcements. See IWM chart below:

iwm81019

SPY is a little trickier for me. It tends to whipsaw in price when volatility picks up, possibly due to algorithmic and HF trading. I think we see SPY revisit $285 range before the end of next week (Aug 9 expiry), but it’ll be a rocky ride.

SPY surprised me this week with the massive selloff that took place on Monday. I thought it would be a rockier ride to get down to $285, but we actually touched as low as $281.72 on Monday!

I was correct about the whipsaw though! Tuesday and Wednesday started off as days that looked like they were ripe for shorting, but the market ripped back almost 2% higher come Thursday, and 4% higher off Wednesday’s lows.

I believe that this upcoming week (August 12-19) will see SPY dropping as low as $279, retesting those levels reached around May 13 this year, in the midst of the May selloff that took place.

I’m also watching the $272 price level to get rested in the next two weeks. See SPY chart below:

I think VIX will also whipsaw next week, seeing a range with a low 14.7 and all the way up to 23.5. That’s just my guess.

This week, VIX saw a high of 24.8 and a low of 16.8. Not too bad of a prediction!

Next week I’m looking for a high of 26 on VIX and a low of 17. Keep in mind, when VIX is this high and with the current news, a much higher VIX is always possible.

I mentioned on my Twitter that I picked up some VXX call options and XLF put options to set up for whatever could happen next week.

These are a small part of my portfolio. I have positions both long and short in tickers or tickers derived from the ones mentioned above.