S&P 500 SPY spreads vs scaled trades.

I got lazy and just used the same chart here.

Last post I mentioned diversification in trade type, price levels and timeframes. It reminded me that I could scale into a trade to try to effect some sort of similar idea, not really DCAing as I am looking to grow a core position by adding to it at key times.

I can make a general assumption that the spreads were all profitable, as they all would have been based on the price moves and trade entry points.

In order to fudge against me I will use my minimum $2.40 per day yield based on a $1200 risk trade. Even though I already see that a SPY spread even at today's low VIX numbers can be much higher than that I would choose the safe trade as $2.40 per day lets me run the spread strike farther away from the price. This is 0.2% per day ROR or 6% ROR based on a 30 day trade.

So a quick 22 trades at 30 days per trade calculation leaves 660 trade days at $2.40 is $1584. I would want to optimize my trading to allow for certain overlaps depending upon my capital so I might run $2400 trades here and there. Regardless, this is for a comparison only anyway.

At most, four overlapping trades which uses up my $5000 base. That is a 31.7% return on the account base and I can add one more trade capability into the mix to start the compounding effect.

Scaling into this through purchasing shares directly in SPY in 10 share chunks. Buy at the good bottoms and hold through the top.

Buy at $70, $80, $90, $90, $100 and 6 shares at $104. Average cost is $87.93 for 56 shares. Current price is about $110 so $22.07 per share gain for $1236....if sold now. With a tight stop during this uncertain period it might get sold... maybe not. I can only make money as the price goes up and can only compound if I sell and catch a drop...if the drop reverses when I think it ought.

Meanwhile I am trading spreads and seeing profits while the price wallows each month as expiry dates pass. This way there is a cashflow. Buying and holding has no cashflow...although there is a slight tax advantage when it comes to capital gains

Jeff.

The Other Side of Diversity

I have read tons about having a diverse portfolio and I always wondered exactly what it would take to be diversified appropriately. I have never seen a clear and concise answer, nor have I ever come up with one myself.

Earlier I alluded to over diversification being a bad thing, at least stifling gains and possibly even creating it's own series of loss factors. I consider diversity to be a form of insurance, insurance is a cost. Rather than belabour the negative side I am looking at a positive way to diversify ...not in the typical sense.

In the interest of being accurate I figured I would pull a dictionary definition for diversity and found that there are many variations of the use of the word and it's derivatives. These from thefreedictionary.com

The definition that seems to apply to the typical idea of diversity as it applies to the stock market and investing or trading might be:

"the quality of being diverse and not comparable in kind"

This leads to buying different stocks within a sector to provide a moderating effect and in different sectors to provide a hedge or safety with a varied and dissimilar portfolio. Key words that I don't much like here are "moderating", "hedge" and "safety".

The one that I found to more accurately represent my idea was not even a primary definition:

"The relation that holds between two entities when and only when they are not identical; the property of being numerically distinct".

This idea very seldom gets any screen time with the exception of the use of Dollar Cost Averaging (DCA) which is really a form of price diversification... buying a stock at numerically distinct prices to provide diversity within the same security.

The trouble with DCAing is that all trades become one trade as it averages the initial cost of the position. This makes the position still susceptible to volatility losses even if the DCA was lower on each successive trade. The other issue is that exiting the position in a profit provides a gain but buying back into the same position requires close to the same dollar figure unless timing is done well...which DCAing is supposed to eliminate. That makes this a buy and hold strategy only.

Here is a chart of SPY for the last 10 or so months:The red arrows indicate rough areas to sell spreads and the green lines are rough levels and duration to sell spreads. The indicator on the bottom is an ADX oscillator and has no real bearing on what I am doing here...yet. The black lines are trend lines that would have been established along the way. I would have had linear regression lines serving this purpose day by day.

The call spread strikes are 90, 95, 99, 102, 105, 107, 110,114, 117, 116

The put strikes are 73, 76, 83, 84, 85, 84, 83, 91, 94, 95, 96, 102

First, diversity by trade type. I run call spreads to bracket the upside and put spreads to bracket the down side. In this case no matter which way the SPX goes at least one direction of the trades will profit. Technically this does not make a true iron condor but it amounts tot he same thing, just with a greater yield due to the optimized entries.

Second, diversity by price level. The calls are all distinctly different even if only my a dollar or two. The puts tended to hover in the middle as the price moved sideways a bit. I expect that I could have gone wider as the put premiums likely headed up a bit due to the uncertainty as to the market direction. Some calls could have been put on along this point as well and given my thinking at the time I would have done so... I was bear minded.

Third, diversity by timeframes. All of the trades are of a short duration and due to that they will be staggered, overlapped and just expiring on 3rd Friday's and end of months depending upon when the price sets up. Longer term trades may be taken if the $2.40 target can be met and there is not too much volatility in the market. There is not one single trade for the whole duration or even a scaled in or scaled out trade. Many multiple profit takings.

Jeff.

Specialization, Diversification, Yield and Perspective

For anyone reading, keep in mind that the purpose of this blog is more for my own "thinking out loud" so some of what I write is repetitive or obvious or just dribble. This may ramble about as I mush out some thoughts and direction.

I updated my sector performance chart.

Comparing it to the Dec 11th one

The same sectors are under performing and over performing against the S&P500, but this is only 5 trading days later.

I am finding that this is giving a good relative performance indication and I could likely run trades based on this, buy the over performers and short or buy inverse ETFs on the under performers in line with the overall market trend. The trouble is trying to use this for spreads on the ETFs. There is not much to capture in the difference in option premium vs the spread size or risk. I mentioned just plunking my cash into Optioneer as they are able to see trades that average in the 8-10% Return On Risk whereas I am starting to see perhaps 4-5% ROR. I thought that perhaps it had to do with Optioneer using iron condors, taking both the call and put side simultaneously but I determined that doing so would only serve to reduce the ROR as call and put premiums vary depending upon the price point of entry (top of the trend channel is best for calls and bottom for puts). Legging would be best but still yields are small.

Of course there are the largest considerations:

Specialization
Diversification
Yield
Perspective

I actually went looking for dividend stocks today out of curiosity, I wanted to get something to stick in the TFSA to be left to grow until I remembered that yields are in the 5-10% for good dividends...per year. Here I am worrying about losing a few percentage points per MONTH.

That looks after the perspective issue for me.

Specialization is easy enough to consider as being able to trade one stock profitably is a good thing, if it can be done relatively consistently.

Diversification is easy as well. trading one stock sounds like putting everything in one basket until I consider that trading the SPY which is tried to the S&P500...500 stocks altogether. It doesn't get much more diversified than that, which provides another interesting problem.

Yield, well, the yield will be the yield and will beat all dividend producers even over the long haul if I just manage to double them, let alone possibly stepping up returns by an entire order of magnitude.

OK, so trading one ETF is diversity but if it is SPY then it can be OVER DIVERSIFIED...huh?

Sure. Trading one over or under-performing sector allows diversity when using ETFs but allows exceptional performance due to specialization. This is the key why SPY can return a better yield in spread trading than most sector ETFs...because it is over-diversified as it represents ALL sectors it cannot help but perform in a rather mediocre style. Just look at the above charts and see that the SPX is consistently ranked 5, 6 or 7 in all categories.

This is the hallmark of a great vehicle to trade a method that works best with relatively non-volatile securities. This allows wider margins and tighter spreads to both give a lesser risk profile over all while still providing a decent yield. Finding the right security to match a preferred method of trading is like curve fitting... but even that has it's advantages.

Next up... diversity through S&P500 price levels.

Jeff.

Long term gap fill in SPY, corresponding SPX reference

In September, October and November SPY, (and the underlying S&P 500), have ratcheted up in waves. No, I am not going to even think about getting in to Elliot wave theory... I don't much care for that as it is VERY subjective. Each wave has peaked mid month and pulled back to bottom out at the end or beginning of each month. Of course a pattern like this can be taken advantage of but there are a number of factors that preclude even trying to place such a wager.

Going back in time a bit, October 3rd 2008, the market was in a downturn and as the market tested the SPY $110 mark on the Friday as it hit $109.68 and closed on $110.34.

It opened on Monday the 6th down at $107.15, a $3.19 gap or 2.89% and continued down more than $30 into March of 2009 to a low of $67.10... almost $40 on the money.

This gap is important as September past tested the bottom of the gap and pulled back. October tested the top of the gap and pulled back. November passed the top, basically closing the gap over one year later, and may see this $110 level as support for now.

If the pattern holds I see the $115 being tested by mid December, which puts my $115-$118 spread in serious jeopardy as it is a Dec 31st expiry. If it does not make it to $115 then I think that it may hit $113, pullback to the $110 support level again before taking off to the $116 level and may do so near the end of December...BAH! I may have to close the spread early in either case.

Of course we may see this level be a further test and a correction take place too.

Either way I will not likely set another spread trade right away in SPY as I wait for a bit while this shakes out. I could place a $1 or $2 higher spread, wait for the first trade to atrophy somewhat and close it to keep some credit and just step the spreads up to the EOM.

Hmmm... step spread trading in the same month to capture premiums in an uptrend situation...has some merit for future thought.

Here is the SPX chart for the S&P500 index. I noted that there is no gap on that Oct 6th morning BUT the level on the Friday closed at 1099.23...say 1100 for now and opened on Monday at 1097.56. The S&P dropped from there and returned the next day to test 1073 and dropped never to look back until testing 1073 in September...basically the exact same range as if it had gapped. Same pattern as the SPY, which it should be, just the lack of gap was noted.

The red lines are the Friday Oct 3rd 2008 close and the following Tuesday test of 1073 with the current correspondence

I like how the price is hovering about the 1100 mark after testing and crossing it, nice consolidation... begs the use of a directionless spread trade to capture the move which ever way it ends up going, as long as it goes quickly. The short Linear Regression channel is showing signs of a slowing down of the uptrend which is remaining within the longer term LR channel so far. Target moves, like in the SPY, are 1080 on the bottom and 1150 on the top.

Jeff.

June 4th

Not much to say today. Sort of a lazy uptrend with a range start and finish, so I don't think this really counts as a trend day. I stayed out of the SSO trades as I was expecting either a range or small move day as the volume was on the lower than average side all day until the EOD rush.

Note that the bars are closing in the bottom of the range.

Although the TICK could have been used for some upside trades I decided to not trade SSO as the moves were going to be rather small so my 100 share lots would hardly break even on a decent move. The upside was smaller than the downside so this was a test of my resolve to watch for downmoves. I hit one good trade and two small losers, one was a too tight stop issue as the idea was sound and the expected move was good. The wrong was really a speculative play for a reversion trade that did not materialize...then I called it quits for short (SDS) trades. I could use larger position sizing but I want to stick with 100 shares for a while yet.

I could have played other ETFs, specifically SPY for the upside moves but I was trying to avoid the downspikes that SPY exhibits. I expected that those would take out a stop. I see that may not be the case as if they did there would be a sudden huge runup of price as market orders were executed as other stops were also taken out at the spiked price...and I survived an SDS spike. Perhaps I do not completely understand what the spike represents. I recall getting caught and creating my own huge down spike on an old trade where I lost a fair chunk of change because of the spike. I think that the spike represents an anomolous fill and does not affect the bid/ask quote therefore the stop does not get triggered. I will rethink my staying away from SPY as a result.

I'll have to consider position sizing and price values when looking at SPY again in my risk management as I need to be playing both the up and down side of the market. SSO may still be a better play with 200 shares.

Jeff.

Late afternoon SPX playing

I happened to sit back down just before 1500h and saw this nice setup in the SPX so I opened up my trading platform, entered SSO into my order box and waited for the appropriate moment to place a limit order for $23.60. I missed getting the order in but I noticed that the spread was only a penny so I didn't need a limit order to get a good inside fill, just a well timed market.

In at $23.64, just off the high from yesterday that was tested just after 1400h, medium strong positive tick. I rode the momentum up to the R1 which had just been tested earlier as well creating a nice bracketed target trade.

Out at $23.84, right at the peak as the price decided to head back down.

18 US cents per share. I forgot about the exchange so that adds 20% more profit due to the leverage action of the exchange rate...about $1.21 CDN for each $1 US.

I also noted that the ECN fees were smaller, 13 cents on the sale and none on the buy compared to 74 cents each way normally in the TSX.

SSO - Proshares Ultra S&P 500 ETF:

Just some notes on my playing this afternoon. I considered taking a short at the top (SDS- Proshares Ultra Short S&P 500 ETF) but figured one decent, albeit small trade is nice addition to the end of day for me. Besides, that would not have followed my trading strategy.

A final note, right now any trade that produces a net profit based on a good idea and well executed is a good trade.

Jeff.

WHOOOAAAA! SPX and my conversion

I have decided to watch the S&P 500 index (SPX) today and see what is going on South of the border as it relates to the market in general.

I have watched many video clips, read a huge number of studies and blogs on the SPX and always lamented the fact that I was not trading that index so all this plethora of information was not really very relevant.

But I kept reading and watching anyway as there were always a few gems in how these various people carried out their analysis, I was still learning something...and who knew, maybe I would end up trading that market anyway.

I am glad that I have kept up. I expect that all of what I have learned while playing in the TSX will be applicable in the NYSE and AMEX.

Back to the chart watching for a bit. In Global Gold I was trading in a relative vacuum. I had the index, of course, the bull and bear ETFs and two stocks in the index as well as my regular charting indicators. I used the TSX Tick accumulation but it was not reliable in any sense.

Today I watched the SPX for a short bit. The Cumulative tick was a very relevant indicator and my normal charting stuff still stands. There are a nice selection of ETFs in the 1:1 and leveraged arena. There are some great daily commentaries from some respected traders and one nice twitter feed that I have been following that gives nice overall information (no trade signals, I wouldn't use them even if they did do that)

I called one trade and watched it as it moved my way after crossing the 200sma, bounced cleanly off of the pivot point and returned to bounce again off of the 200sma. Using bull and bear ETFs that would translate into 40 cps and 20 cps moves (the 20cent move is in an ETF that is 1/3 the value of the ETF with the larger move...at least double the position size so the result would be the same). I think that technical indicators may have a larger effect on trading due to the much larger volume.

Keep in mind that these moves were small, 0.6% and 0.8% respectively based on the prices but this is a slow range trading day so far. Yesterday, using only my 200sma entries there were three trades all day. 35cps, 12cps and 71cps. I figured 10 cent stops to start and using only the 50 sma for moving stops once in. I will need to do some backtesting on this then work out other scenarios but it looks promising.

Downside, larger spreads, larger ETF valuation which means larger capital allocation and possibly larger allowable loss figures. I may go looking for smaller valued issues but I don't think I will find them. 10 cent stops or even 20 cent stops are within my loss allowance given the price of the issues so I am OK with that.

Well, that's all for now. Back later with some charts I expect.

If anyone is following along I hope my shift from Global Gold and the TSX altogether isn't disconcerting. I am trading in an RRSP right now so all tax implications are deferred, and I plan on switching over to the TFSA later, once I get settled, comfortable and gain some level of consistancy in these new markets.

For reference:

Index: SPX
Bull ETFs: RSU, SSO, SPY
Bear ETFs: RSW, SDS, SH

Jeff.