M3 - The best strategy?

[Jerry3]

Circuit breakers were introduced to prevent such situations, yes. They likely will provide some help.
There are also scenarios in which circuit breakers will bring more harm than good. For example with dire marker conditions, after big down day, in after-hour trading circuit breaker is triggered. Next day we open gap down and within 15 minutes of trading (plus L1 and L2 breaks, if they are triggered at all) we reach L3 - full stop. So you have 15 minutes to close your positions and it is not only you in this position. If you are lucky and determined you may be able to buy some puts (you will be paying 2 or 3 times what you platform shows).
The same play next day.
And you are sitting with your complex positions to unwind.

As said, this is extreme.
Point is: circuit breakers or not, you should know what you are doing.

Scared? (

[/URL] )

With pleasure I re-quote after KiwiDon:

"A Ship in Harbor Is Safe, But that Is Not What Ships Are Built For" John A. Shedd

Happy sailing.

Not at all ! If we were scared , we shouldn’t be trading now should we

 

[Jerry3]

Circuit breakers were introduced to prevent such situations, yes. They likely will provide some help.
There are also scenarios in which circuit breakers will bring more harm than good. For example with dire marker conditions, after big down day, in after-hour trading circuit breaker is triggered. Next day we open gap down and within 15 minutes of trading (plus L1 and L2 breaks, if they are triggered at all) we reach L3 - full stop. So you have 15 minutes to close your positions and it is not only you in this position. If you are lucky and determined you may be able to buy some puts (you will be paying 2 or 3 times what you platform shows).
The same play next day.
And you are sitting with your complex positions to unwind.

As said, this is extreme.
Point is: circuit breakers or not, you should know what you are doing.

Scared? (

[/URL] )

With pleasure I re-quote after KiwiDon:

"A Ship in Harbor Is Safe, But that Is Not What Ships Are Built For" John A. Shedd

Happy sailing.

Just curious , what is your strategy with dealing with a “ black swan” type event?

 

[Marcas]

Jerry3
I do not trade any specific strategy. At least not to the letter. It is blend of everything I know (not much). Same with black swan I use different things in context of my overall positions and market conditions. Most often I use long puts in different places, often in combination with PCSes or CCSes like backspeads or kites, sometimes only PDSes.
So... it depends.

I'm exploring small PM account management ,so my regT risk is most of the time greater than my trading capital.

 

[Jerry3]

Jerry3
I do not trade any specific strategy. At least not to the letter. It is blend of everything I know (not much). Same with black swan I use different things in context of my overall positions and market conditions. Most often I use long puts in different places, often in combination with PCSes or CCSes like backspeads or kites, sometimes only PDSes.
So... it depends.

I'm exploring small PM account management ,so my regT risk is most of the time greater than my trading capital.

I think the problem most butterfly traders have is when you hedge your negative vega, it’s hard to find enough protection without ruining the entire trade or get whipsawed by over hedging

 

[Jerry3]

Here is a good comparison of VIX calls vs SPX puts

https://www.soa.org/library/newslet.../2015/august/jrm-2015-iss33-lerner-metli.aspx

 

[Kevin Lee]

I think the problem most butterfly traders have is when you hedge your negative vega, it’s hard to find enough protection without ruining the entire trade or get whipsawed by over hedging

This is so true.... I have been trying to find protection that doesn't cost too much. I have seen people promoting so-called "free" hedge but those are not really free.

In a nutshell, it's using some form of credit spreads or even naked shorts to pay for the cost of hedge either entirely or partially. The issue with that approach is the credit spreads do take additional risks for a period of time to earn enough decay to pay for the hedge. This method did work fabulously in the past two years because market was in a perpetual upward movement. Therefore, 10 out of 10 times, having some kind of put credit spread or naked put worked. The hedge did turn out either free or mostly free. But in today's environment, that's an entirely different story. Imagine you put on a put credit spread and market dropped 5% the next day.

Some other hedging structures I have seen include staggering, meaning using the previous hedge to protect the current credit spreads until it decays enough. But that means the previous hedge isn't protecting the main income trade.

And then there are ..... ditto ditto ditto ... many variations of same concepts, either using longer or shorter duration options and playing with different volatility sensitivities of the long short options.

Anyone has any great idea for the current environment?

 

[tom]

I started trading the M3 live mid-late last year after extensive backtesting. I was in small profit up till the beginning of this year. My Feb and March cycles both hit max lose due to the IV spike in Feb and after the down move and IV spike this week, unless we get a bit of a rally or a drop in IV, April will also be a max loss - that's 3 max losses in a row, which is a scenario I had never hit in backtesting and it's not the best of starts after a few months of trading! I entered my May position on Thursday 45 mins before market close and due to the continued down-move and rising IV, that position has already had a big adjustment and is also down a bit of money too.

I have other accounts dedicated to different strategies like M3, Road Trip Trade (RTT), Bearish Butterfly and some TastyTrade style trades. All of them except the Bearish Butterfly are negative P&L since I started trading last year. My worst performing accounts are the M3 and the RTT. The RTT has been a disaster over the last year if you are a subscriber to the alert service, with minuscule wins for most of the year and then a few months of huge losses, leaving a damaged account. Also, do not believe that the RTT is one of those systems where adjustments are minimal. This is only true when markets are not moving fast. If they are moving, there will be plentiful adjustments to make and if you have multiple trades open like they do in the alert service, you will be getting hit with a lot of alerts, some of which are very confusing and unless you stay on top of them, your trade will go into huge losses very quickly with little to no chance of recovering!

For me, this market has been incredibly difficult to trade and discouraging. The moves are too large in either direction and when IV does spike, it takes forever to contract, meaning that you have to go closer to expiration to start realising any profits. If you are already less than 14-21 DTE and the IV spikes, your open trades are toast.

Most Income Trade Strategies have fared badly from Feb 2018 onwards .
Neither M3 nor RTT were exception. It was not the size of drop of indexes but the fast speed of the drop of indexes that caused the major losses for income trades.
I have read AKJ state on this forum before.

many of the strategies you mentioned, mine included, have a tendency to experience big losses in the left-tail of the return distribution.
You can be humming along for months-on-end generating 3-4% or more, but my eyes are wide open to the fact that a 20%+ drawdown could be around every corner. These drawdowns really hurt your long-run CAGR.

And sometimes time on initiating the fresh trades work in your favor and other times they can work against you.

Posted by Sanjeev B

 

[Anil]

Anil, thanks for sharing your experience. Although it is not a pleasant one it provides good info to be put alongside 'buy my strategy, it is the best one out there'. I agree with your conclusions and I hope loses are not devastating. If it to be at any comfort, most of us, if not all, went through this stage. I admire your confidence when after taking couple loses in a row you still put another trade. I advise caution, maybe hit the pause for a while. Market changed. How much? We don't know yet. It is possible that strategies that worked well in past few years won't work anymore. On other hand you can miss great opportunity. It is tough.

One thing is sure; nobody knows what will happen next. If you hear predictions, many with brilliant reasoning... some of them will be right others - wrong. I attach link to todays article in HZ, probably you've already seen it, if not take a time and watch attached clip. It is so actual. Not to say if it's predictions are right or wrong. You have to be ready for every possibility (within a reason), if not, I advice to at least reduce size.
If you miss opportunity, there will be many others to come, if you avoid disaster - you stay in the game. It's up to you.

(Oh boy, if I hear myself few years ago I'd ignore everything.)

www.zerohedge.com/news/2018-03-24/david-rosenberg-it-was-black-friday-black-monday

Thanks Marcus, I've been trading small so I'm 'only' down around 10% of my total account, which is not too bad, I guess, but when the rest of the passive world is up money and didn't have to put in any effort or work to be in that position, it's disheartening. With something like the Bearish Butterfly, it only takes 2-3 profitable trades to be back in profit again, so that keeps me going. Also, with IV pumped as it currently is, it's a good time to enter one of these trades, as per my rules, so I don't want previous losses to stop me from doing so. If I get drawn down around 20% then something is very wrong and I will need to stop and re-evaluate.

What I would advice new people is to try and learn a strategy and get a feel for how options work - don't just follow an alert service or someone else's trades blindly. This is where I think the M3 course is fabulous. If you follow its guidelines and back test, you will get a good feel for how to manage your risk using greeks and the T+0 line. I'm trading both the M3 and RTT at the moment to get a feel for the strategies and see which one I like best, but going forwards, I think will drop the RTT and trade the M3 and Bearish Butterfly only. Some of the alerts on the RTT service have been quite shocking recently and modelling some of these in OptionVue led me to either not take action or do something different (thank goodness!) - attributable to the techniques learned in the M3 course.

 

[Anil]

This is so true.... I have been trying to find protection that doesn't cost too much. I have seen people promoting so-called "free" hedge but those are not really free.

In a nutshell, it's using some form of credit spreads or even naked shorts to pay for the cost of hedge either entirely or partially. The issue with that approach is the credit spreads do take additional risks for a period of time to earn enough decay to pay for the hedge. This method did work fabulously in the past two years because market was in a perpetual upward movement. Therefore, 10 out of 10 times, having some kind of put credit spread or naked put worked. The hedge did turn out either free or mostly free. But in today's environment, that's an entirely different story. Imagine you put on a put credit spread and market dropped 5% the next day.

Some other hedging structures I have seen include staggering, meaning using the previous hedge to protect the current credit spreads until it decays enough. But that means the previous hedge isn't protecting the main income trade.

And then there are ..... ditto ditto ditto ... many variations of same concepts, either using longer or shorter duration options and playing with different volatility sensitivities of the long short options.

Anyone has any great idea for the current environment?

Why not keep things very simple and buy a put that is less than 30 DTE when an IV contraction happens? Maybe roll into the next 30 DTE cycle just before expiration week. Or simply trade small lot Bearish Butterflies until we get back to a more 'normal' market where the price moves and IV highs and lows are less extreme?

 

[Jerry3]

Why not keep things very simple and buy a put that is less than 30 DTE when an IV contraction happens? Maybe roll into the next 30 DTE cycle just before expiration week. Or simply trade small lot Bearish Butterflies until we get back to a more 'normal' market where the price moves and IV highs and lows are less extreme?

Another problem like on Feb 5th, even if you’ve hedged your position it will be painful trying to close your position for a decent price. I really think the best hedge is position size on income trades .

 

[status1]

https://www.soa.org/library/newslet.../2015/august/jrm-2015-iss33-lerner-metli.aspx

It was interesting to see that video and to observe the parallels between the DOW than and the SPX now
In the video it was saying that the DOW went down 390 points in 2 weeks to go below 2300 while in the beginning of February this year the SPX went down 340 points in about the same time frame
Since than the DOW went up more than 10 times that amount in 30 years

I was just wondering what will happen if SPX keeps going higher ?
Will we be able to keep trading it the same ?
Will the SPX behave the same at 3000 as it did let's say at 1500 ?
Will the bid / ask prices get wider the higher it goes ?
I think there will come a time when the magnitude of the moves will be too big for any income trade to absorb unless you do a directional trade or make the hedge so big that you hardly make any money on it
I mean does anyone do M3 or RTT on the NDX ? Probably not many
Everyone may have no choice but to trade the RUT pretty soon
Just a few years ago the SPX was around 1500 which is where RUT is trading recently
Does the RUT trade similarly now as SPX traded when it was at 1500 ?
I figure it's better when it's at 1500 because you have a better chance of staying near the tent and not move around in big moves in a short period of time and have more time to adjust

 

[Jerry3]

It was interesting to see that video and to observe the parallels between the DOW than and the SPX now
In the video it was saying that the DOW went down 390 points in 2 weeks to go below 2300 while in the beginning of February this year the SPX went down 340 points in about the same time frame
Since than the DOW went up more than 10 times that amount in 30 years

I was just wondering what will happen if SPX keeps going higher ?
Will we be able to keep trading it the same ?
Will the SPX behave the same at 3000 as it did let's say at 1500 ?
Will the bid / ask prices get wider the higher it goes ?
I think there will come a time when the magnitude of the moves will be too big for any income trade to absorb unless you do a directional trade or make the hedge so big that you hardly make any money on it
I mean does anyone do M3 or RTT on the NDX ? Probably not many
Everyone may have no choice but to trade the RUT pretty soon
Just a few years ago the SPX was around 1500 which is where RUT is trading recently
Does the RUT trade similarly now as SPX traded when it was at 1500 ?
I figure it's better when it's at 1500 because you have a better chance of staying near the tent and not move around in big moves in a short period of time and have more time to adjust

It’s not the size of the NDX that makes it hard to trade but the volatility compared to SPX

 

[Jerry3]

It was interesting to see that video and to observe the parallels between the DOW than and the SPX now
In the video it was saying that the DOW went down 390 points in 2 weeks to go below 2300 while in the beginning of February this year the SPX went down 340 points in about the same time frame
Since than the DOW went up more than 10 times that amount in 30 years

I was just wondering what will happen if SPX keeps going higher ?
Will we be able to keep trading it the same ?
Will the SPX behave the same at 3000 as it did let's say at 1500 ?
Will the bid / ask prices get wider the higher it goes ?
I think there will come a time when the magnitude of the moves will be too big for any income trade to absorb unless you do a directional trade or make the hedge so big that you hardly make any money on it
I mean does anyone do M3 or RTT on the NDX ? Probably not many
Everyone may have no choice but to trade the RUT pretty soon
Just a few years ago the SPX was around 1500 which is where RUT is trading recently
Does the RUT trade similarly now as SPX traded when it was at 1500 ?
I figure it's better when it's at 1500 because you have a better chance of staying near the tent and not move around in big moves in a short period of time and have more time to adjust

I’d like to know if anyone trading the indexes with income trades survived the feb 5th drop unscathed.

 

[Paul Demers]

I did ok in Feb with the drop trading M-3's.

 

[Jerry3]

I did ok in Feb with the drop trading M-3's.

Paul, would you care to share how you hedge(d)? Were you rolling back further than normal ? I noticed it was mostly the vol increase that was tough to combat.

 

[Paul Demers]

I had 4 M-3 style trades and 2 calendar trades on at the time. I bought the calendars right at the high in Jan. I bought some debt spreads for both style of trades and the day before the 100 point down move I paid a lot of money for a 14 DTE put for the calendars. So the hedges were pretty basic. With the M-3 style trades I add new trades trying to stay ahead of the market as its going down and in fact put on 4 new ones on the big move down on Feb 8th. I was very lucky with the calendar trade as the long put did its job and I closed the put on the bounce on Feb 9th. Like you I am a firm believer that size is the best hedge. This past Thursday and Friday I closed all my index positions and went to cash as this is reminding me of Aug 2015.

 

[Jerry3]

I had 4 M-3 style trades and 2 calendar trades on at the time. I bought the calendars right at the high in Jan. I bought some debt spreads for both style of trades and the day before the 100 point down move I paid a lot of money for a 14 DTE put for the calendars. So the hedges were pretty basic. With the M-3 style trades I add new trades trying to stay ahead of the market as its going down and in fact put on 4 new ones on the big move down on Feb 8th. I was very lucky with the calendar trade as the long put did its job and I closed the put on the bounce on Feb 9th. Like you I am a firm believer that size is the best hedge. This past Thursday and Friday I closed all my index positions and went to cash as this is reminding me of Aug 2015.

Nice Job! I’ve heard mixed reviews on calendars during a crash , some good some bad. It sounded like yours worked out! Were you profitable or did you just not lose your shirt?

 

[Paul Demers]

I was scared with the calendars but in the end made about 10 % or so. THe butterflies I had on before things go ugly broke even and the new butterflies I put on all made a little over 5% in a week on the rebound. I was very lucky. February and march trades have recovered almost all my losses from January. I do like that the volatility is elevated but the price movement in the SPX does keep one on his toes. All my trades are geared to have positive gamma at setup even if it means they have negative theta.

 

[Jerry3]

I was scared with the calendars but in the end made about 10 % or so. THe butterflies I had on before things go ugly broke even and the new butterflies I put on all made a little over 5% in a week on the rebound. I was very lucky. February and march trades have recovered almost all my losses from January. I do like that the volatility is elevated but the price movement in the SPX does keep one on his toes. All my trades are geared to have positive gamma at setup even if it means they have negative theta.

That’s awesome! The only part of what you just said i don’t like is the “ lucky “ part lol.
Better lucky than good is the saying.

 

[Jerry3]

I was scared with the calendars but in the end made about 10 % or so. THe butterflies I had on before things go ugly broke even and the new butterflies I put on all made a little over 5% in a week on the rebound. I was very lucky. February and march trades have recovered almost all my losses from January. I do like that the volatility is elevated but the price movement in the SPX does keep one on his toes. All my trades are geared to have positive gamma at setup even if it means they have negative theta.

Were you down at all during the trades before you closed for a profit?