Forward Testing Investment Strategies: 2018

Saturday, November 3, 2018

Option Assignment Status for Option Expiration Nov 2 2018

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Overview/Review

I'm attempting to reduce the number of assignments that occur as a result of the cash-secured-put (CSP) strategy that I'm using. Ideally, we want to sell premium in a stock or ETF and have the equity close at 4 pm ET on the day of option expiration (OE) above the strike value of the put. When this occurs, we collect the full premium of the option that we sold, less any commissions.

We have recently experienced a sharp drop in markets that started around the end of September/beginning of October. When we sell premium on options and when the value of the equity drops below the strike price of the option that I sold, it's considered in the money (ITM) and if it does not recover above the strike by OE, we will be assigned the stock at the strike price, not the market price. By design this means we will carry a paper loss in the portfolio until 1) the stock recovers OR 2) we can lower the stock basis by selling more premium and/or buying more shares at a cheaper price.

Personally, I do not like carrying a paper loss.

I mitigate part of the risk by buying quality stocks (rising earnings, revenues, and free cash flow), but this is not a guarantee that the stock will rise. It simply suggests that the stock will not go to zero, but certainly, it can drop.

I also place a buy-to-close (BTC) order on every CSP that I sell, and if I'm greater than 5 days from OE, I set the value to $0.10 and if I'm within a week of OE, I set the value to $0.05. This helps ensure that if the option price gets close to worthless sometime in the contract period I can close out and lose the obligation to buy the stock if it is ITM at OE.

What is better is to simply not be assigned the stock in the first place, e.g., ensure that the stock never drops below the strike value of the option.

Alerting Process

Every day potential CSP position-sell-alerts are generated by my system and are echoed in real time to my Twitter feed ( https://goo.gl/UoGgBg ) as well as to a shared Dropbox folder: https://goo.gl/WbuJhS The Dropbox folder contains an historical view of all alerts that met my CSP criteria.

I do not always take every trade that is alerted, but since these are broadcast, I presume that every alert is reviewed and possibly entered by one of my followers.

I've changed my stock-selection strategy over the past two weeks, since October 13th, so trades after this period should expire worthless or there should be an incredibly low percentage of trades that are assigned.

The November 2nd OE just closed yesterday, and the following shows unique options that were alerted since September:

Click on the image to enlarge.

The rightmost 5 columns: Underlying Close on 11/2, Assigned, Option Close Value, BTC Fired, Assigned, are all added as part of this analysis. It should be clear what each column represents -- if not, feel free to ask.

Results

As you can see, only 12 options fired alerts since 9/18. This is in part because I naturally omit stocks based upon price performance, and if they are dropping, they are in a downtrend, which is poor for a cash secured put. Hence, every one of these stocks was in an uptrend at the date/time that the alert was generated. For those that ended on OE ITM, they simply collapsed after the alert was generated. This is what I seek to avoid.

Of interest is that had I taken every signal, I would be holding every one of the top 4 stocks right now MOMO-HES-VRTX-CMI. These closed below the option alert value, and these never would have fired my BTC. These positions moved against me and had I sold them, I would be holding stocks at a considerable loss (on paper). You can see these designated as "1" in the rightmost column (they were assigned).

Stocks that alerted for the 11/2 OE since 10/15 have performed much better, despite some of the negative downward movements of the market. Out of this list, only one -- ADBE -- would have been assigned yesterday, and this is a good sign. All the rest would have expired worthless (close of the stock was above the option strike) or the value of the option got within the BTC value of $0.10 or $0.05, depending on the week considered.

You can look at the underlying performance in the following chart: this plots the S&P 500 (down about 1% since 10/15) and all the other stocks that alerted since that date. All are up relative to their alert dates:

Click on the image to enlarge.

Conclusions

Although this is only the 2nd week of alerts that I've evaluated, the new stock selection process looks like it could be helping to reduce the potential of being assigned. Out of the 12 alerts for 11/2, 8 were generated on or after 10/15, and only one of these would have been assigned.

I will keep track of this going forward and we'll see if there is an improvement in assignment rate (measured as number of stocks assigned vs. number of alerts).

Stay tuned.

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That's all for now. If you have questions -- ask.

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As with all my ramblings, you are responsible for your own actions and I am not. Nothing I've written here is advice to buy or sell any security, so don't do it unless you absolutely take ownership for your actions.

Regards,

Paul

Saturday, October 27, 2018

The Fisher Transform - Multi-Timeframe Entry and Exits

Sample Duration: 10 years
Moving Window Approach: 2002-2012, 2004-2014, 2006-2016, 2008-2018, all windows ending on 9/30 of their respective year
Sample Stocks: The stocks of the NASDAQ-100.
Starting equity: $100,000.00, no margin.
Position Size: 1% of equity, commissions & slippage not considered
Fisher Transform Window Size: 10 days for Daily, 5 weeks for Weekly. I have discussed elsewhere that John Ehlers picked the 10-day window length and I've confirmed that this is the best length given multiple window tests.
Position entry requirement: The close > 50d MA > 150d MA > 200d MA.
Enter / exit on the next day open after the signal bar
If entering a position, hold it at least 1 bar to avoid whipsaws.

The test conditions are relatively straight forward:

Consider two time frames: weekly, daily.
Enter / exit if the weekly and daily are in a particular combination of uptrend and/or downtrend
Enter / exit if the previous week or previous day were opposite than the current week or day, and the current week or day is in a particular known combination of uptrend or downtrend.
Ignore weekly conditions for the sell and just test for daily conditions to exit

When you do these various combinations you end up with 24 unique tests per window (weekly can be uptrend/downtrend, daily can be uptrend/downtrend for a total of 16 unique combinations, and if we ignore the weekly data and just re-evaluate the daily, that is another 8),

2002 - 2012 Optimized Entry/Exit Results

Here are the top 4 results from 2002 to 2012. The period contains a significant drawdown event in 2008-2009:

Click on the image above to enlarge.

The list is sorted from highest equity descending. There is about a 3:1 reward/risk component, which I consider acceptable.

The top performer contains the following rules:

Enter when the WEEKLY Fisher Transform transitions from a downtrend to an uptrend AND the DAILY is already in an uptrend. Put another way, the weekly is confirming the daily trend.
Enter when the DAILY Fisher Transform transitions from a downtrend to an uptrend AND the WEEKLY is already in an uptrend. Put another way, if the weekly is already in an uptrend and the daily has whipsawed in and out and comes back in, enter when the DAILY goes to the uptrend.
Enter when the WEEKLY Fisher Transform transitions from an uptrend to a downtrend (0) and the daily is already in a downtrend. This means that the daily has fallen and is being confirmed now by the weekly. This is a "buy the dip" condition that we are familiar with.
Enter when the DAILY Fisher Transform transitions from an uptrend to a downtrend (0) and the weekly is already in a downtrend. This should rarely happen, since the daily should lead the weekly down.
Exit criteria varies.

Two of the top 4 performers suggest that you exit when the weekly transitions to an uptrend (1) from and downtrend AND the daily was already in a downtrend (0).
The third top performer suggests that you exit when the WEEKLY transitions from an uptrend to a downtrend (0) AND the daily is an an uptrend.
The 4th top performer suggests ignoring the weekly signal (-1) and exit if the daily transitions to a downtrend (0).

All of these are plausible, so should be part of our tool kit.

2004 - 2014 Optimized Entry/Exit Results

Moving onto 2004-2014 yields the following results:

Click on the image above to enlarge.

Take a look at the right side of the figure -- it varies somewhat from 2002-2012 but if you look closer, the ordering is different but the conditions are the same. The TOP performer maps to the second-best performer for the 2002-2012 period, but in general, the entry and exit conditions are consistent between the two window periods.

2006 - 2016 Optimized Entry/Exit Results

Click on the image above to enlarge.

Again, look at the right side of the 2006-2016 figure. The top performer is the 0-0-1-0 sequence, which was the top performer in the 2004-2014 test window and the 2nd best performer in the 2002-2012 window. The other three sets are the same as the previous windows too, they are just in a difference order.

Finally, to relate this to the blog entry of two days ago and using the SP 500 (recall that these tests have been with the NASDAQ-100):

2008 - 2018 Optimized Entry/Exit Results

Click on the image above to enlarge.

The top performer is the same as the 2006-2016 and 2004-2014 top performer. All the others are present too-- just reordered.

Furthermore, this set of data matches the tests presented two days ago for the SP500.

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Conclusions

There are incredibly consistent results across the period 2002 - 2018. I note the following:

Although the magnitude of the portfolios varied in each 10-year moving window, the number of trades remained fairly consistent.
Entering and exiting trades as listed above gives us a defined range that we should experience performance, independent of changing market conditions.
From a rational point of view, each of the different entry/exit conditions are "plausible" in that if we were simply doing ad-hoc trading we would most likely duplicate one of the entry and one of the exit conditions. All I have done here is quantified and explicitly identified each of the conditions so that we can track them.

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I tackled position sizing yesterday and we established that between 5-20 positions would be ideal from a Total Return / Maximum Drawdown perspective. I arbitrarily selected 11 positions as the go-forward portfolio size.

Additional work that follows is now to consider the use of stop losses and profit targets, and do so across a large range of trades.

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That's all for now. If you have questions -- ask.

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Regards,

Paul

Friday, October 26, 2018

The Fisher Transform - Impact of Position Sizing

Click on the image to enlarge.

As you can see in the figure above, which is a 10-year span, the test never deploys 100% of the cash -- if a stock is available to participate then it does.

Contrasting, here is what happens when you only allow 4 stocks to be part of your portfolio:

Click on the image to enlarge.

As you can see, there are discrete jumps in portfolio position size as a single issuance takes off, causing the entire portfolio to jump in value.

Position Sizing with the Fisher Transform (and in General)

Position sizing is a significant concept to grasp, because it ultimately impacts your returns. If you have too many positions (over diversified), not only is this difficult to manage, but you literally are missing out on gains available in individual positions because your position size, relative to the portfolio, is too small. Think mutual fund or ETF and you understand the concept.

So, what is the best portfolio sizing?

Historically, the ballpark number is between 7 and 25, but the actual number depends largely on stock selection and entry/exit criteria. Poor exit criteria and you ride your stocks down but if you have many this may not be bad -- but if you have few it is disasterous. Seems obvious but it is not a "one size fits all" answer.

VectorVest generally goes with 10. This is safe but certainly not always the best.

GorillaTrades varies with an entry or two per night, and by the time you sell your initial profit target, you could be holding 25-50 small positions and this will absolutely drive you batty crazy.

Hence, the key is to find a sweet-spot in position sizing that maximizes return but minimizes drawdown (risk).

To demonstrate the procedure, the test is going to vary the position size between 1% (100 positions if all were invested) and 25% (4 positions if fully invested). Two primary variables are to be observed:

Total Return (TR)
Maximum Drawdown

A third variable will be optimized: the quotient of these two (TR/MDD). This is because we want to balance reward (TR) with risk (MDD).

Here are the results:

First, Total Return (TR):

Click on the image to enlarge,

Note that between 2% and 16% (50 and 6 positions) that the total return has a tight grouping and increases as the number of positions drops (or as the position size grows). This is what we expect -- if we have too many positions (small position size), we are overdiversified and for a large number of trades, we dilute our portfolio too much.

Also note that after 16% the variance of returns gets quite large. This is due to the "running out of cash" constraint and means that whatever stock was available when cash became available was the next candidate. This is a dangerous place to think you can ever duplicate the TR values, as total return in this area is completely dependent upon market conditions and whatever stock is available.

Based on the results above I would have absolutely no fewer than 6 positions and no more than 50 positions (50 is too much, but the data is what it is).

Let's look at maximum drawdown (MDD):

Click on the image to enlarge.

Here, this shows an opposite behavior to TR: As position size grows, maximum drawdown increases, which is what we expect. The LESS diversified we are the more we are subjected to the individual performance of a stock, and if that stock drops, we capture more of that drop.

As with the TR plot, we see a much wider variance above 16%, so fewer positions than 6 are not advised. On the maximum number, it goes to reason that if we have 100 positions (1% position size) then we have maximum dilution so the drop in any one position is small, relative to the entire portfolio. Everything checks.

Let's take a look at the ratio between the two, TR / MDD:

Click on the image to enlarge.

First of all, the downward slope of the curve fit line tells me that MDD has a bigger impact on portfolio performance than does TR. If the line were pointing up we would want to be limiting our positions to a few (perhaps 6-10), but because it is pointing down, this is pushing us to the left, which suggests having more positions in the portfolio.

The BEST yield of TR/MDD is when there is a position size of 1% -- 100 positions in the portfolio. My experience is that this simply is not practical. Commissions and simple daily management are extremely difficult at this level (think Gorilla Trades).

TR tells us we want to be as far to the right as possible to maximize return. This suggests 16% position size, but it has the worse TR/MDD ratio (as evidenced by the falling trend line).

I would compromise. It appears, if you can stomach the drawdowns, that the position size range of 5%-15% (20 to 7 positions respectively) is not a bad place to be. If you are a bit more conservative the number is closer to 20; if you are a bit more aggressive then you are closer to 7.

I'm going to choose a 9% position size, which will be 11 positions. This will be a good balance going forward.

Note: there is no "correct" answer.

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Additional work that follows is now to consider putting emergency stops and possible profit targets in place. Note that I'm loathe to put a stop in any strategy, but analysis guides that outcome, not my bias.

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That's all for now. If you have questions -- ask.

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As with all my ramblings, you are responsible for your own actions and I am not. Nothing I've written here is advice to buy or sell any security, so don't do it unless you absolutely take ownership for your actions. Please read and acknowledge the disclaimer on the upper left of the web page where you are reading this.

Regards,

Paul

Thursday, October 25, 2018

Preliminary Results-The Fisher Transform-When to Buy and Sell

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If you are on the blog page in a web browser from a computer, please subscribe to this using the "Follow by Email" link to the left. If you're on a mobile device you should see something in the frame that allows you to subscribe. Having your email helps me to notify you when Google mucks up email distribution.

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The Fisher Transform

Much of my focus as of late has been on John Ehlers' work, specifically the art of making the Fisher Transform actionable. If you have not been following this thread you can review the Fisher Transform here: https://www.mesasoftware.com/papers/UsingTheFisherTransform.pdf

Summarizing, the most common moving average method compares two moving averages, a shorter one and a longer one, and when the shorter one crosses the longer one we have a turning point. The problem with moving averages is that they introduce lag, and hence, the longer the time frame being measured, the more lag that is introduced into the signal.

The Fisher Transform differs from moving average methods in that it does not use moving averages -- it looks at a window of prices and based upon this window it adjusts the current price as defined by the transform. Hence, it has virtually no lag, and is very quick to identify possible turning points. In general, it works and is quicker than moving averages and relative strength indicators, so push the "I believe button", at least for now.

As you dig into the use of the indicator you will quickly realize that there are several conditions that can occur. For example:

If the Fisher Transform is in an uptrend, should I enter? It could have been in an uptrend on the last bar also. Is the signal too old?
If the Fisher Transform is in a downtrend, should I exit? Same thought process as the previous questions.
If the Fisher Transform signal is new and the previous bar is opposite the new signal, is this a good entry or exit point?

The analysis gets more complicated if multi-timeframes are introduced into the mix. For example, if I have weekly and daily bars, and run the Fisher Transform on each of these time periods, does this reduce or improve entry/exit performance? Specifically, all the questions above apply, but now:

Does the state of the weekly Fisher Transform signal provide any improvement to performance?
What is the correct window length for the weekly Fisher Transform? Is it the same as the daily Fisher Transform? Does this window length materially change realized performance?

You get the idea. Things get complicated quite quickly.

Fisher Transform Testing Results

I'm not going to give every minutia of details here but will summarize enough that those skilled in the art of backtesting should be able to approximately duplicate my results. Here is the setup:

Sample Duration: 10 years
Moving Window Approach: 2004-2014, 2006-2016, 2008-2018, all windows ending on 9/30 of their respective year
Sample Stocks: The stocks of the S&P 500. The 2004 set of runs only utilized 486 of the possible set.
Starting equity: $100,000.00, no margin.
Position Size: 0.5% of equity, commissions & slippage not considered
Fisher Transform Window Size: 10 days for Daily, 5 weeks for Weekly. I have discussed elsewhere that John Ehlers picked the 10-day window length and I've confirmed that this is the best length given multiple window tests.
Position entry requirement: The close > 50d MA > 150d MA > 200d MA.
Enter / exit on the close of the signal bar
If entering a position, hold it at least 1 bar to avoid whipsaws.

The testing methodology tests for a number of conditions:

vary the weekly entry signal for both a downtrend entry as well as an uptrend entry
vary the daily entry signal for both a downtrend entry as well as an uptrend entry
vary the entry (daily or weekly) such that only enter / exit on a change from the previous state, for example, only enter if the daily/weekly meet a known condition and yesterday's daily signal was different from today's (same thing with the weekly)
ignore the weekly and only consider daily entry/exit signals, all within the context of change from the previous day's signal

The following is a representative equity curve and drawdown profile for one of the tests, for the period 2008-2018:

Click on the image to enlarge

This is an "okay" equity curve, but there are flat periods that would have challenged whether you stick with the strategy and sit in cash or worse yet, with a paper loss in your account.

The individual equity curves look more / less like this across all of the sample periods. Here is the same presentation but from 2004 - 2014:

Click on the image to enlarge

You can see that the period of the 2008-9 financial crisis is relatively flat, which is an outcome of the 50-150-200d MA requirement for entry (see note at top of this post).

I stress that none of the other parameters in the account are optimized (position size, emergency stop exits, etc.) so you should not infer too much into this strategy. For example, the strategy most likely would benefit from some sort of emergency stop:

Click on the image to enlarge

This is the Maximum Adverse Excursion (MAE) plot, which plots drawdown on the X-axis and profit/loss on the Y-axis. Wins are cyan, losses are magenta. A large majority of positions have some drawdown before they recover. Some never recover. Clearly, there are more losses below ~ 27%, so having an emergency stop in this area most likely would benefit the strategy.

Mark that for future analysis.

Drum roll please ...

The following outcomes do not represent the highest equity peak, the highest K-Ratio, nor the highest Sharpe Ratio. I find that zeroing in on a single parameter is a fools errand, so I tend to look for groupings of performance where each of those parameters is "in the same ballpark", and have consistent outcomes across various moving window time frames.

Click on the image to enlarge

Here's what you are looking at, left to right:

Test Number: Nothing to infer here.
Total Return: Nothing to infer here either, except that there is a variance of returns. $100K doubles the money in 10 years; $170K nearly triples the money in money in 10 years. Rule of 72's and all of that.
Trades: Fewer trades with the top performer (37), which means you probably have to have a greater tolerance for drawdown.
Avg Trade/Drawdown/Max Drawdown: Self evident
Sharpe Ratio: in general, the higher, the better, but SR has limitations
K-Ratio: in general, the higher the better. The larger the number the more steady the returns
Total Return / Max Drawdown: Larger is better
Inputs: Wbuy, Dbuy, WSell, DSell: test harness conditions. The right 4 columns break these out so I can filter.

Your takeaways are these (and I was a bit surprised):

Enter when the WEEKLY Fisher Transform transitions from an uptrend to a downtrend AND the DAILY is already in a downtrend. Put another way, do not ENTER until the WEEKLY confirms the daily downtrend.
Enter when the DAILY Fisher Transform transitions from an uptrend to a downtrend AND the WEEKLY is already in a downtrend. Put another way, if the weekly is already in a downtrend and the daily has hung on, as soon as the daily flips to a downtrend, ENTER.
Exit criteria varies. The "1", "-1", and "0" mean that for selling, weekly status doesn't really matter - it's the change in weekly that counts. The weekly signals help.
Exit when the DAILY signal moves to a downtrend from an uptrend. This was common for all entry cases. Remember -- bar count is at least 1 bar (a day), so there is no same-day selling as the day you entered. The entry and exit signals are not in conflict.

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I've been doing daily analysis on the Fisher Transform and I'm impressed. It's not a holy grail, but it is pretty darn good at identifying turning points and what you should be doing with positions.

The results to date have been somewhat counter-intuitive, specifically regarding entering the position when we are transitioning to a downtrend; when I started to look at the trades it made sense if we are to capture the full range of the trend and most of the stocks are already in an uptrend.

Additionally, the selling criteria using the weekly exit signal dramatically improves returns. Adding the selling criteria of ANY weekly transition (uptrend to downtrend or downtrend to uptrend) beat simply using the daily exit. The table below shows a 2.6% average return for each daily exit, and a 3.2% return for each weekly exit, independent of direction of the weekly transition.


Signal Name	Average of Profit(%)
DayTransExit	0.026120579
WkTransExit	0.032469279

Grand Total	0.028515908

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Additional work that follows is now to consider position size (what is the optimal position size?), and to look at putting emergency stops in place. Note that I'm loathe to put a stop in any strategy, so I need to see that somehow a position is trapped and has no chance of recovery, based upon my rules, and that a back door is required.

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That's all for now. If you have questions -- ask.

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Regards,

Paul

Wednesday, October 24, 2018

Selling Calls in AMAT

AMAT

I presently hold 500 shares of AMAT and presently have no calls sold, so am looking to collect revenue in the form of premium.

AMAT is presently trading below my paper break-even level. This suggests that the further I move away from that level, the cheaper calls become, and this means I collect less as the stock drops. It also means that if I sell a call against my holdings that there is a non-zero chance that the stock could be called away below my basis, e.g., at a loss.

As a result of this possibility, I tend to wait for new short-term trends to materialize before selling calls or puts. Right now, with yesterday's action, a new short-term signal down has triggered, which means that the stock is moving away from my break even and that selling out of the money (OTM) calls most likely will expire worthless.

AMAT is quality stock but is in an industry that is getting hammered. On a year-over-year (YOY), quarter-over-quarter (QoQ), and trailing 12-month (TTM) basis it is doing well:

Click on the image to enlarge.

Based on these values (all positive), I am continuing to hold the underlying and sell premium. If any of these measures were to turn negative I'd look to unload the underlying.

To select the correct calls, I typically plot the bids across various option expirations (OEs):

Click on the image to enlarge.

The rows of this table are various strikes and the columns are the OE dates. The colored portion of the table shows the annualized return on option (AROO) that is possible if the premium received is at the indicated level.

You can see that option premium peaks on 11/16, relative to today, and then falls off. Hence, to capture the maximum amount of premium, I look to see which OE peaks for a given strike. I've circled the 11/16 AROOs to show specifically where I'm looking in terms of maximizing my return. As it turns out all of the strikes peak in 11/16, but others also dip in the 11/23 week then start trending upwards.

Another consideration is that the closer I get to the present value, which is around $33, the greater the probability that the stock will rise to that strike value. Because my basis is above the strike levels shown, I simply want to collect the call premium and have the option expire worthless.

I did not show this but the $37 strike has a delta of +0.17 and a Probability of OTM of 86%, reflecting a low chance that AMAT will be called away. This is the balance of selling premium below your breakeven.

I entered a trade to sell five AMAT 181116C37 and received $0.30, just under the desired $0.31. If held to OE my AROO would be 13.3%. Due to my practice of placing buy-to-close (BTC) orders, I'll most likely close the position earlier than OE and should return more than what is shown.

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That's all for now. If you have questions -- ask.

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Regards,

Paul

Monday, October 22, 2018

Update on CSP Twitter Alerts

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If you are on the blog page in a web browser from a computer, please subscribe to this using the "Follow by Email" link to the left. If you're on a mobile device you should see something in the frame that allows you to subscribe. Having your email helps me to notify you when Google mucks up email distribution.

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Administratia:

First of all, thank you to those of you who have sent in real $$$ to pay for the Zapier subscription. I'm happy to state that of the $240 required for the next year I've received more than half (but less than the $240), and rather than send the money back to those that sent a check or used Paypal, I'm going to go ahead and update the subscription to start today and run for the next year.

Follow the alerts at https://twitter.com/GreekGodTrading

The restoration of the alerts does not mean that all is good -- I still need everybody who is a benefactor of my Twitter CSP alerts to show a little respect for value that you receive and send me a few bucks. 10 of you means $24/year - $2 per month. 5 of you is $4/month. You can Venmo (https://venmo.com/Paul-Duncan-16), Paypal it to pduncan@vt.edu, or send me a note and I'll send you my mailing address.

I'm certainly not looking to make any money from you -- I just want expenses covered for a service I provide for free and that many of you have expressed that you receive benefit from.

Let your conscience decide what you should do. For the few that have sent a few bucks -- thanks.

Send $$$!

Regards,

Paul

Sunday, September 30, 2018

Septermber 2018 CSP - CC Performance

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If you are on the blog page in a web browser from a computer, please subscribe to this using the "Follow by Email" link to the left. If you're on a mobile device you should see something in the frame that allows you to subscribe. Having your email helps me to notify you when Google mucks up email distribution.

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Administratia:

Please read the previous blog entry regarding my Twitter CSP alerts. The link is here: https://fwdtest.blogspot.com/2018/09/csp-updates-for-friday-sep-28.html

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Multi-timeframe uptrending stocks and ETFs have been updated for the open on Monday, October 1st, and are available here ( https://goo.gl/XZKgwY ). The archive subfolder contains historical lists that you can review back in time and see how they would have performed going forward.

The alerts files (monthly historical as well as the alerts generated today, after market open), are available here ( https://goo.gl/WbuJhS ). The archive subfolder contains historical alerts files that you can review.

Real-time Q&A with me, if I'm available, is through this link: https://discord.gg/4QAUqyd This is Dr. Jeff Scott's HGSI Discord forum and it's worth your time to join (free). I am @PaulDuncan at Discord and I typically watch the #cashsecuredputs-n-coveredcalls channel. Come say "hello"!

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Theoretical 9/28 Option Expiration Performance

Here is a review of the alerts for the 9/28 OE. The following options expired out of the money (OTM), so the premium collected is ours, less commissions:

9/13/2018 ADBE 180928P252.5
9/20/2018 ALGN 180928P360
9/18/2018 ALGN 180928P370
9/26/2018 ALGN 180928P375
9/24/2018 BBY 180928P76
9/24/2018 FFIV 180928P190
9/13/2018 FIVE 180928P125
9/14/2018 GRUB 180928P136
9/24/2018 HES 180928P70
9/21/2018 LNG 180928P65
9/17/2018 NOW 180928P190
9/7/2018 PTCT 180928P41
9/6/2018 SQ 180928P80
9/12/2018 SQ 180928P85
9/17/2018 SQ 180928P87
9/25/2018 TQQQ 180928P66
9/24/2018 UCO 180928P33
9/24/2018 ULTA 180928P267.5
9/24/2018 UPRO 180928P55
9/24/2018 UPRO 180928P55.5
9/24/2018 XLNX 180928P75
9/25/2018 XLNX 180928P76

All totaled, if you collected the premium advertised at the time of the alert (not realistic unless you have a big account, e.g, about $350,000 available per week), you would have gained approximately 0.62% on the monies, or an average weighted annualized return of nearly 23.1%. Note that the latter number isn't an exact science because of all the different dates of the alerts, and I'm not taking the time to annualize each one (although you can -- the data is in the alerts file).

Over the life of the option contract the following alerts never hit our $0.10 or $0.05 buy-to-close (BTC), and since they were in-the-money (ITM) at the close, will be assigned. We still get to keep the premium, which goes into the general fund, and now we must sell a covered call against each of these come Monday:

FAS 180928P71
FAS 180928P73
JDST 180928P80
KMX 180928P76
LITE 180928P60
MOMO 180928P45.5

I note that LITE closed at $59.95, just $0.05 ITM. *assigned!*

So, 6 of 28 were assigned, or about 21%. I'm working on improving this number - the research is ongoing but is resulting in better identification of turning points and a better time to enter the write-put or write-call order. The goal is no assignments and 100% expire worthless or hit their BTC before OE, but obviously, this is a moving target because the markets are constantly changing.

NONE of the assigned positions are lower than 7% paper loss, and the average paper loss is -2.6%. This means that on Monday most will have a call with very high premium close to our closing strike price.

So, for example, for the assigned FAS 180928P71, I'd sell the $71 call ("breakeven strike") for 10/5 for about $0.90, which is 0.90/71 = 1.29% Return on Option (ROO) and for the 5 days next week, is 1.29 * 365 / 5 = 95% annualized return (AROO). If it gets called we keep all of the premium and lose possession of FAS, and if it doesn't get called we still keep the premium and get to sell another call the following week. The graphic below shows the call side of the option chain for FAS for 10/5, at the $71 breakeven strike:

Click on the image to enlarge.

I note that the actual premium received will be determined after the market opens on 10/1. The figure above is snapped during non-market hours, so is subject to change.

Rinse, repeat.

I personally like to sell a call right at the assignment price ("breakeven strike") because holding stock is far more risky than holding a cash-secured put, and I want the equity to be called away as soon as possible.

One final thought: On the assigned positions, I'm most likely going to BUY a PUT at the same time that I SELL a CALL. I was just assigned a position in JDST, so let me demonstrate the thinking.

1) Find the minimum premium that I'm willing to receive for a COMBO transaction.

My breakeven strike is $79.00 I want this money to work for me, so I'll sell a call at this strike.
My target AROO is 20%. Your actual mileage may be different. Be realistic, and as I've proven, 20% is well within the reach of my strategy.
My strategy currently has a win/loss rate of 92% (and change). I adjust the minimum premium by this so we "juice" the premium requirement by this amount to drive it upwards. Ask if this isn't clear.
There will be 2 contracts, one on the call side, and one on the put side.
I've set a buy-to-close (BTC) of $0.05 on the call -- it is possible that if the ETF rockets downward towards my put that this could trigger. I can turn around and sell another call if this happens (Alan Ellman's "hit a double").
Round trip commissions is actually just the entry commissions for both the call and the put ($1 each at TradeStation) and the called away commission ($14.95). My expectation is to be called away and for the put to expire worthless.
5 days to expiration (Mon-Fri)
Collect a minimum of $67 to hit at least a 20% AROO.

2) Now, go find a combo that results in meeting at least $0.67 in received premium:

When we look at the profit/loss graph, we have the following:

Click on the image to enlarge,

There's a lot of information here:

I can achieve approximately $0.78 collected in premium by selling the JDST 181005C79 and buying the JDST 181116P59. This is above my minimum premium requirement of $0.67.
The combo lowers my exposure more than just selling the call. The net delta (using weekend numbers and presented without proof here) is 100 (long 100 shares JDST) + (-50.2359) (short 1 JDST 181005C79) = ~49.8 and when I add the JDST 181116P59 long put (delta -14.0937) I end up with the circled -64.3296 delta adjustment, making my next exposure $35.67/contract. This is why I keep saying that options are better than owning stock -- your exposure is less than owning the stock outright.
There are few nuances in the graphic. The darker area is the 1-standard deviation move of JDST between now and November 16, which is the expiration of the put. There is a 68% chance that JDST could fall to our put within this time.
If that occurs (price falling to around $59, we'll lose money at the -$35.67/-$1 change in underlying, but the value of the put will go up at least $14/-$1. Once the price falls enough, the put delta increase will exceed the rate at which the call is reducing, so while we will still be underwater, we'll have downside protection.
While it doesn't show it in the graphic due to time value, below $59 we are completely covered in risk.

So, what is the risk profile for this strategy? Glad you asked.

Holding just 100 shares of JDST at a break even of $79 means we lose $1 for every dollar drop (-$1 / -$1) in JDST. Conversely, we make $1 / $1 for every dollar rise in JDST. The position delta is "100" for every 100 shares that we own. Get used to this concept of delta. It's really important when you own a zillion positions and want to know your portfolio exposure.
If JDST closes above $79 on 10/5, the equity will be called away at $79, not including commissions. This is the best possible case, and is the goal for any covered-call position in terms of risk reduction.
If JDST closes below $79 on 10/5 but above ($79 - 0.78) = $78.22 then we make *some* money, just not our full 20% that was a our target. The position delta (including the protective put), is somewhere between ~64 and ~86, depending upon how close to $79 we are or how close to $78.22 we are. This is okay, because if you owned 100 shares and had zero options you would lose between $0 and $78. Make sure you understand why, and ask if you don't understand.
If JDST closes below $78.22 the call expires worthless and the put is increasing in value. Position delta is at least 86 but is dropping (which is good) as the put value increases. On paper you are losing no more than $86/$1 change in JDST and this rate improves (gets less) as the price drops. We have until November 16 to keep playing with our 100 shares in JDST and have downside protection. Remember, you pocketed $78 in selling the put/call combo, and since the put is still alive, now it's time to sell another call for 10/12. Keep collecting premium, and enjoy the downside put protection.

You get the idea.

~~~~~~~~~~

Theoretical 9/28 Option Expiration Performance

The strategy continues to plod forward. On a month-over-month basis, the good/bad/ugly for the entire option portfolio has the following equity chart:

Click on the image to enlarge.

So, 9-months in with real money, full visibility of what I'm doing, etc. shows that on a month-over-month basis it is possible to generate consistent income by selling cash secured puts and covered calls. Note, a strategy adjustment was made at the end of January 2018 to account for the mistakes made in January 2018, and these changes (position size rules and rejection of emotion) have helped portfolio performance in a dramatic way.

Breaking this down by week shows a few more bumps that are not visible in the monthly:

Click on the image to enlarge.

The last week of August and the second week of September were slightly negative due to the lack of positions to take that met minimum premium as well as a few rolled positions that resulted in losses within those weeks (when you roll, you buy-to-close an existing position, and if you have to pay to BTC, you may have to give up your premium if the buy price was more than you sold the original position).

In general, I'm quite pleased with the lower-left / upper-right trajectory. I can take a few weekly bumps, and am constantly learning how to improve.

Note: The addition of the "buying a put" well OTM that I discussed previously with JDST is another enhancement and should also reduce risk and improve long-term performance, at minimal impact to overall profits.

~~~~

That's all for now. If you have questions -- ask.

~~~~~~~~~

As with all my ramblings, you are responsible for your own actions and I am not. Nothing I've written here is advice to buy or sell any security, so don't do it unless you absolutely take ownership for your actions.

Regards,

Paul

Friday, September 28, 2018

CSP Updates for Friday, Sep 28

Review the past alerts by going to my Twitter alert account and judge for yourself whether this is or can be valuable to you as you navigate the CSP/CC world: https://twitter.com/GreekGodTrading

If you want the alerts restored then I need to collect a total, from all folks, of $240. 10 of you means $24/year - $2 per month. 5 of you is $4/month. You can Venmo it to me here or via Paypal at pduncan@vt.edu. If I do not receive enough monies I'll return your payment to you, less any charges (if there are any). I'm certainly not looking to make any money from you -- I just want expenses covered for a service I provide for free (-ish) and that many of you have expressed that you receive benefit from.

If you are asking why I don't simply pay for it the answer is easy -- I already have the alerts.

Let your conscience decide what you should do. For the few that have sent a few bucks -- thanks. We'll see if we reach critical mass.

~~~~~~~~~

Multi-timeframe uptrending stocks and ETFs have been updated for the open on Friday, September 28th, and are available here ( https://goo.gl/XZKgwY ). The archive subfolder contains historical lists that you can review back in time and see how they would have performed going forward.

The alerts files (monthly historical as well as the alerts generated today, after market open), are available here (https://goo.gl/WbuJhS ). The archive subfolder contains historical alerts files that you can review.

Real-time Q&A with me, if I'm available, is through this link: https://discord.gg/4QAUqyd This is Dr. Jeff Scott's HGSI Discord forum and it's worth your time to join (free). I am @PaulDuncan at Discord and I typically watch the #cashsecuredputs-n-coveredcalls channel. Come say "hello"!

~~~~~~~~~~

Premarket Alerts:

The following options are signalling a need for further review in this morning's premarket. The opportunity that is available in these is due to higher-than-normal bid/ask premium availability, and will most likely vaporize after the open (markets are efficient).

WWE 181019P90

DXCM 181019P135

NBIX 181019P115

BPT 181019P30

CURE 181019P62

EVH 181116P25

I note that some of these options and underlyings were extremely active yesterday. Here are the options that alerted yesterday (available in the alerts file that is linked above):

ALGN 181005P370

ALGN 181012P370

ALGN 181019P370

BPT 181019P30

BPT 181116P30

DXCM 181019P135

EVH 181116P25

MPC 181005P80.5

NBIX 181019P115

NFLX 181005P360

NFLX 181012P360

OILU 181019P57

OLLI 181019P90

SGEN 181019P75

SQ 181005P90

SQ 181012P90

SQ 181019P90

SQ 181026P90

TECL 181019P154

TQQQ 181005P66

TQQQ 181012P66

TQQQ 181019P66

WWE 181019P90

For some of these to continue for more than a day means juiced value in the option chains and as such, the underlyings are worthy of further research.

As usual, these are not recommendations to sell premium - do your homework.

Evaluating the Quality of the Alerts

A question came in last night asking how to evaluate the alerts.

A link for the alerts was provided at the top of this blog entry ( https://goo.gl/WbuJhS ). Within that folder you will see a file "Sept_2018_Master_Alerts" or, if you're reading this after September, probably the month that we're currently in.

Copy that file to your machine.

Open it up. The right-most column lists the option expiration date.

Pick the date you are interested in. Since today is OE (9/28), when I use all the alerts generated for 9/28 within September (as of close of 9/27) I get the following option symbols and the first date of the alert:

9/13/2018 ADBE 180928P252.5

9/20/2018 ALGN 180928P360

9/18/2018 ALGN 180928P370

9/26/2018 ALGN 180928P375

9/24/2018 BBY 180928P76

9/24/2018 FAS 180928P71

9/24/2018 FAS 180928P73

9/24/2018 FFIV 180928P190

9/13/2018 FIVE 180928P125

9/14/2018 GRUB 180928P136

9/24/2018 HES 180928P70

9/11/2018 JDST 180928P80

9/14/2018 KMX 180928P75.5

9/13/2018 KMX 180928P76

9/6/2018 LITE 180928P60

9/21/2018 LNG 180928P65

9/18/2018 MOMO 180928P45.5

9/17/2018 NOW 180928P190

9/7/2018 PTCT 180928P41

9/6/2018 SQ 180928P80

9/12/2018 SQ 180928P85

9/17/2018 SQ 180928P87

9/25/2018 TQQQ 180928P66

9/24/2018 UCO 180928P33

9/24/2018 ULTA 180928P267.5

9/24/2018 UPRO 180928P55

9/24/2018 UPRO 180928P55.5

9/24/2018 XLNX 180928P75

9/25/2018 XLNX 180928P76

Presume you sold the contract the minute the alert was issued.

Now, take each option symbol and review the chart for the option symbol, and ask yourself the following:

1) Did the option symbol touch $0.10 or $0.05 any time during the period from the original alert to today? If the answer is yes, and you understand how to place a buy-to-close, good-til-cancelled order, then you made money.
2) If the answer to 1) is "no", then look to see if the underlying is going to close today above the strike price of the option. If the answer is "yes", then you made money.
3) if the answer to 1) and 2) are both "no", then you must either make the decision to roll today (or prior to today) or allow yourself to be assigned. If the option underlying is a quality stock, then being assigned is not a bad thing because you can write a call against the stock position and further collect money.

So, as an example, the following symbols have touched $0.10 or below in the month of September:

SQ 180928P80

SQ 180928P85

SQ 180928P87

ULTA 180928P267.5

XLNX 180928P76

ADBE 180928P252.5

BBY 180928P76

LNG 180928P65

UCO 180928P33

FFIV 180928P190

TQQQ 180928P66

HES 180928P70

FIVE 180928P125

UPRO 180928P55

This means you would have closed out of the position with a buy-to-close order and would have pocketed 80-90% of the original premium, less the BTC and commissions.

This also means the following option contracts are still open:

ALGN 180928P360

XLNX 180928P75

ALGN 180928P370

GRUB 180928P136

LITE 180928P60

ALGN 180928P375

NOW 180928P190

UPRO 180928P55.5

FAS 180928P71

JDST 180928P80

MOMO 180928P45.5

KMX 180928P75.5

FAS 180928P73

KMX 180928P76

PTCT 180928P41

The underlyings, as of premarket this morning, are as follows:

ALGN 389.97

FAS 70.60

GRUB 139.50

JDST 82.50

KMX 73.00

LITE 61.00

MOMO 43.77

NOW 191.06

PTCT 47.06

UPRO 56.87

XLNX 79.85

Here is what this means going into OE today:

ALGN is WELL above $360 so will be out-of-the money (OTM). Expire worthless = collect all.

FAS is just below $71, so you may be assigned, maybe not. It looks to pin close to $71

GRUB is most likely going to close OTM ==> expire worthless

JDST is OTM this morning

LITE is OTM this morning

MOMO is ITM this morning and may be assigned. Good stock, sell a CC.

NOW is OTM this morning

PTCT is well OTM this morning

UPRO is OTM this morning

XLNX is OTM this morning

So, out of all the of the options that expire today, the real risk going into the open is FAS and MOMO -- every other option will expire worthless by the end of the day (OTM) or already has triggered the BTC (buy to close) order.

Remember: my strategy has a 93% win rate.

Rinse, repeat.

~~~~~

That's all for now. If you have questions -- ask.

~~~~~~~~~

Regards,

Paul

Thursday, September 27, 2018

CSP Updates for Sep 27

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If you are on the blog page in a web browser from a computer, please subscribe to this using the "Follow by Email" link to the left. If you're on a mobile device you should see something in the frame that allows you to subscribe. Having your email helps me to notify you when Google mucks up email distribution.

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Administratia:

Multi-timeframe uptrending stocks and ETFs have been updated for the open on Thursday, September 27th, and are available here. The archive subfolder contains historical lists that you can review back in time and see how they would have performed going forward.

The alerts files (monthly historical as well as the alerts generated today, after market open), are available here. The archive subfolder contains historical alerts files that you can review.

Real-time Q&A with me, if I'm available, is through this link: https://discord.gg/4QAUqyd This is Dr. Jeff Scott's HGSI Discord forum and it's worth your time to join (free).

~~~~~~~~~~

Cash-Secured Put List Observations for Thursday, September 27th:

The market action over the last few days has forced removal of a number of candidates, relative to where we started the week. We are down to 33 stocks and 11 ETFs as the total possible candidate list. The individual components are provided above in the multi-timeframe list folder.

Premarket alerts that you may want to review are the following:

NFLX 181005P360, collect at least $2.15 to realize at least 20% annualized return on option (AROO)
ALGN 181005P370, $1.95, 18% AROO
SQ 181005P90, $0.97, 34%
UCO 181005P32.5, $0.35, 26%
NFLX 181012P360, $3.95, 23%
UPRO 181012P54, $0.55, 17%
EVH 181116P25, $0.75, 18%
TQQQ 180928P66, $0.25, 49%

These alerts will most likely vaporize at the open as they are the result of bid/ask values during non-trading times. This being stated, they point to potential premium availability in the underlyings, and hence, there is juice in the chains worth capturing.

Pay particular attention to leveraged ETFs, as these will be volatile.

These are not recommendations, nor should you blindly jump into these and sell these contracts without doing your own due diligence. Do your homework and own your decision.

Cash-Secured Put List Observations FROM Wednesday, September 26th:

A number of option symbols alerted yesterday and were sent to Twitter-land for your review (more on Twitter below):

ALGN 180928P375
ALGN 181005P375
ALGN 181012P375
ALRM 181019P52.5
BPT 181019P30
BPT 181116P30
CSOD 181019P55
EVH 181116P25
HES 181005P68
HES 181012P68
NBIX 181019P115
QLD 181019P94
TQQQ 181005P65.5
TQQQ 181012P65.5
TSCO 181026P85.5
UCO 180928P33
UDOW 181019P104
VNOM 181019P40
WWE 181019P90

All of these, if acted upon when the alert was generated, provided greater than 15% AROO if held to expiration and if they expired worthless. The respective underlying symbols are showing increased opportunity to collect higher premium.

Again, not recommendations. Do your homework and own your actions.

~~~~~~~~~~

Status of Twitter Alerts

My Twitter Alert feed is here: https://twitter.com/GreekGodTrading

My subscription with Zapier to link TradeStation email alerts to Twitter has hit the maximum allowed under their free plan (100 alerts per period). They want $240 ($20 / month payable in a yearly traunch) for 1,000 alerts per month, which is far more than we will need.

I'm not willing to spend money on something that I have no need for. I get the alerts (obviously), since they are running on my server. The issue is that YOU don't get the alerts, and day-after does not make them actionable for you.

So, the ask:

I need to collect $240 total from you. You can Venmo it to me here or via Paypal at pduncan@vt.edu. If I do not receive enough monies I'll return your payment to you, less any charges (if there are any). I'm certainly not looking to make any money from you -- I just want expenses covered for a service I provide for free (-ish) and that many of you have expressed that you receive benefit from.
Let your conscience decide what you should do.

A question came in over night on what is the breakdown of the Twitter information.

Here is a typical Twitter alert:

ALGN:!P_CSP1.5. ALGN 181012P375, MinBid=$4.05, MinPrem=$293.71, Last=$393.11, AROO=23%, Prob=70%, Spread=$0.40, ROO=1.1%, Days2Exp=17, CashReqd=$37095, IVRank=11.6, StrikeInc=$2.50, Delta=-0.2390, ImplVol=0.34, TSTime=1450. 9/26/2018 2:50:55 PM

Let's break it apart:

ALGN:!P_CSP1.5: Header information from TradeStation. The symbol is ALGN, and the strategy that generated the alert is !P_CSP version 1.5
ALGN 181012P375: The option symbol that meets the cash-secured-put criteria
MinBid=$4.05: This is the minimum amount that you will want to receive in premium, for selling one contract, in order to meet the listed annualized return on option (AROO) value in the alert (see below)
MinPrem=$293.71: This is the real-dollar-value, after commissions, adjustment for strategy parameters (win rate, buy-to-close value, etc.) that you will need to collect to hit the AROO. The MinBid value above is the INCREMENT of bid/ask that you sell; MinPrem is the actual value, including adjustments, that you will collect and put in your bank account after the dust settles.
Last=$393.11: The last trading price of ALGN at the time of the alert
AROO=23%: If you get the numbers presented in the alert, this is your MINIMUM annualized return.
Prob=70%: This is the Black-Scholes pricing model estimate of probability of being OTM at options expiration. I only alert on symbols that have at least 68% ProbOTM.
Spread=$0.40: The current spread between bid-ask. I only alert if this value is less than $0.49.
ROO=1.1%: Return on Option. This is what you will get in premium divided by the option strike price less any option premium received. The denominator is your risk; the numerator is your reward.
Days2Exp=17: Days to expiration.
CashReqd=$37095: This is the minimum amount you must have in your account to sell 1 contract. This is the cash secured value of the option contract.
IVRank=11.6: Implied volatility rank. At the time of the alert, the IV of ALGN is only 11.6% of the yearly range.
StrikeInc=$2.50: The next lowest strike is $2.50 away
Delta=-0.2390: The greek "delta" for this option symbol is negative 0.2390. I typically stay below the 25 delta for most of my CSPs
ImplVol=0.34: Implied volatility: 34%
TSTime=1450: Tradestation time that the alert was generated
9/26/2018 2:50:55 PM: Twitter date/time that the alert was posted.

If there are any questions about what to do with these alerts please post here, send me a note, or engage me at the Discord CSP-CC forum.

~~~~~

That's all for now. If you have questions -- ask.

~~~~~~~~~

Regards,

Paul

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