What better way to show my trading strategy than to illustrate some actual examples on volatility spike and contraction. If you follow my trades, I was slightly delta short and today was a good day when volatility spiked in the front month of the VXX, causing my limit order to fill in the VXX. I placed this trade a couple of weeks ago as a way to hedge my long positions. On the contraction illustration, I entered a trade in RAD (Rite Aide Corp) over a week ago when volatility reached 100%. Note that this is not a liquid stock and I typically shy away from it. Furthermore, I usually enter my trade on a third day of a large gap down as can be seen in the chart below. Then wait for volatility to collapse, which is did today dropping from 100% to 40%. Even though the underlying moved against me by a whopping 18%, I'm still making money and it was a profitability trade.
Happy Friday! I have not had time to document my daily trade as my new job demanded a great deal of my time. But I wanted to illustrate a specific trade and its volatility, which is a mean reverting process. Here is an existing short position I have on SPY. I placed this trade a few days ago to counter my long positions so that I'm slightly short delta in my overall position as beta weighted against the SPY. As shown below, even though SPY went up by +0.26 or +0.12%, my short SPY gained about 10% in premium profit. This is because volatility continues to drop as shown in the red arrow below. Typically, in this scenario I'll close my trade for a quick profit and wait for volatility to pop again or other opportunity to arise. Keep in mind that small profits will add up to big fat profit over time. If you make enough trades, you can continue to call your broker to lower your trading fees. But this specific trade, as noted, is used to counter my overall position. Volatility used to scare the heck out of me and would cause me to close losing positions at the wrong time when I first started to learn about option trading. Happy trading....
2016 was a transition year for me as I took a new job and relocated my family to the Seattle area toward the end of the year. I've no access to my mobile phone and little to no internet access in my prior job. To continue engaging in my trades, I rely on commodity oil future contracts which are traded almost 24 hours a day starting on Sunday evening at 6pm Eastern Standard time. This has allowed me to engage in my trading strategy. This is not always optimal as the trading volume tends to be light outside of the main trading hours with the bid-ask spreads being wide. To place my trades, I always use limit orders and sometimes they don't get fill. This is also true for my limit orders in regular security underlying contracts. As such, I did not place a lot of trades in 2016. I look forward to placing a lot more trades this year. My trading continues to be somewhat light as we're at market highs. At the moment, my overall position is delta short as beta weighted against the S&P 500 Index (SPY). I'll patiently wait for opportunities to present itself before scaling into my trades. By opportunities, I'm referring to panic or market uncertainty that will drive higher volatility and thus richer premium contracts. If you can stomach volatility, which is a mean reverting process, you can make money.
Here is a snapshot of my closed positions after the first week of 2017. Note that 100 shares is equivalent to one contract. Most of these positions were placed toward the end of last year, see Open Date column below. This is to illustrate my favorite part of the strategy and that is to take profit and take is often. Some of the positions such as CRM, EXPE, and WBA were in the red since I entered these trades and when they eventually breakevens or made a tiny profit, my limit orders to close got filled. I'm currently going over my trading strategy with a good friend and co-worker, Chi. He is currently applying this strategy on his retirement accounts via covered calls to start.