My job was to write shell code to perform Unix admin jobs and C code to improve the trading model. I also had to write a program that would ring a bell at night to wake the night trader when she had to trade.

The portfolio model took the mean returns of all the possible instruments and their variances and tried to build a portfolio that would maximize the return with the smallest possible variance. No one likes a big variance in return. One program I worked on extended this to the skew and kurtosis of the currencies. I also wrote a program that got these different moments of the distributions from the option series for the currencies and bonds that we traded.

The traders called the banks to get the best prices for the currency contracts that the program told us to buy. We had Reuters to tell us what the market was at any time, but the trades were done over the phone.

He mentions two trades:

1) Buy natural gas futures and sell oil futures. Not recommended since the divergence can last longer.

2) Sell integrated oil companies, XOM, etc.. in your portfolio and buy natural gas companies like Chesapeake.

I would edit the above to include:

Buy natural gas ETF LEAPs and sell Oil ETF LEAPs

Sell short integrated oil and buy natural gas companies as a pair trade.

Worth listening to.

Most of the straddles are fairly priced. MA and GS and CME look like possibilities.  The last column is the probability to exceed either break even point, stock + straddle and stock – straddle value.

Google Dual Calendar Spread

The July options’ implied volatility is much higher than August. After earnings the implied volatility of the near month collapses. What effect does that have on the profit graph?

Here is the profit graph of the dual calendar spread with the volatility skew.
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This is what happens if the volatility of the near month options drops to the implied volatility of the far month options.

The intermediate profit rises to the final form when the near month volatility drops. So you get an added lift from the implied volatility collapes.

but basically, just look for generally uptrending names, and then short some puts into mini dips

My guess is that the mini dip where he sold some puts was at the point marked 1. My guess is that he sold 105 puts. Just to keep the trades concrete, say he started out short 10 July 105 puts. I don’t know and he won’t say.

The “T” on the chart labels the day that ICE fell through the 105 strike like a hot knife through butter. AW was in trouble.

So I ended up covering by turning the put short into a butterfly, going long the 100 strike. That was the mediocre.

Long twice as many 100 puts as he was short 105 sounds good to me. Of course, if this is a butterfly, then he was also short, maybe, the 95 puts. So now our hypothesis is that his position is:

-10 105 P,
+20 100 P and
-10 95 P

And he has turned his profit distribution from this:

To this:

Look at the purple line, since that is where the position is when it is put on. He is working his way to breakeven if ICE keeps falling, but no better than break even. Hence “mediocre”.

Stock kept going lower, so then had my one good idea. Just converted it to long downside gamma by shorting more 105 puts so that I was now short the 105-100 put spread 1:1, and then bought an equal number of 95 puts and a little stock.

So the hypothetical position now looks like:

-20 105 P
+20 100 P
+20 95 P

The position gets to break even at 86. Which is where it closed Friday.

That part worked out well yesterday as the stock imploded. The only thing holding me back was….well, me. I got short and shorter thru 95 and was patient all the way until….the 91’s. Which sounded great at the time, not knowing it would go to the 84’s. By which time I bought more stock and kept the long gamma game going by purchasing some July 85 puts.

Roll it all up and a lot of trouble to pretty much break even, although even sounds good compared to the initial ugliness of my put short. I’m now just long some gamma. For the moment, will probably sell some “wings” (OTM puts and calls) and call it a day.

A good recovery.

Fear of missing out makes traders and investors impatient. It is best to wait for the exact situation that you have tested, rather than relax your discipline in order to participate in the action.

Poliakof breaks up the trading day into three sections. The open, from 9:30 to roughly 10:15, when the market mean reverts, he claims. The middle of the day, 10:30 to 2:30, when the market consolidates, digesting what happened in the morning. And the close, from 2:30 or 3:00 to 4:00 PM, when anything can happen.

Here Poliakof discusses pressing your advantage when trades are going in your favor. It is important to keep track of your results so that you can see what is working and what isn’t working for you.

BofA (BAC) is down 3 cents to $12.87 and fell 6.2 percent on the week, but some players in the options market expect strength over the next two months. BAC August 14 call option is today’s most actively traded contract, with 56K traded so far. Today’s trades include a “reverse diagonal spread”, where a strategist bought 15,000 August 14 calls and sold 15,000 January (2010) calls at the $20 strike. They paid 45 cents and are probably looking for a move beyond $14.45 by the August expiration, but not above $20 by mid-January.

…If you are interested in more info like this, check out WhatsTrading.com

Above we see the five-day average volume (top chart) for the S&P 500 Index (SPY) and the five-day average trading range (bottom chart). One theme stressed on this blog is the importance of trading volume, largely because of its correlation with volatility.

As stocks have moved higher since the March lows, volume has steadily declined and so has the average high-low trading range. Stocks now provide almost 1/3 the expected range as earlier in the year.

This is why I find it crucial to adjust profit targets for volatility. (Note: SPY profit targets are posted every morning before the market open via Twitter; follow here or check the last five tweets on the blog page). Without such adjustment, we inevitably expect too much out of a trade when volatility comes out of the market, leaving us open to frequent and frustrating reversals.
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Interestingly, though we’ve moved back into May’s trading range in the S&P e-mini (ES) contract (pink line above), the Cumulative NYSE TICK has stayed well above May levels. Continued strength in Cumulative TICK would suggest to me that we’re experiencing a correction in a bull market, not the start of a renewed bear.
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