July update

Today was a little more like it in the day trading realm as it was a $350 day. This month has been very lack luster as the first week was a holiday week, the trading room had to do some paring of deadwood and the market is not moving very fast anywhere to enable quick trades to take place in the first hour.

I figure that anything over $500 this month is a bonus so I have no expectations for the rest of the month... that does not mean there will be no more profits than that, it just means that $500 or more is my target.

Why set an upper limit target?

My momentum trading is still set to take a large hit tomorrow as nothing is really moving in my favour. One option is actually in the money but I paid enough for it that the stock price would have to be a couple...or three... dollars ITM to be even break even. I just have to be sure to close any trade that is set to expire ITM as I do not want to get assigned a stock. In fact I think that I will contact Questrade and clarify if I need to close positions if I have no intention of taking the stock.

Jeff.

More pro-value sizing calculations

Previously I had started using same sizing on my daytrades, I was up to 5 contracts for each when I shifted over to same value instead, due to it proving to be a better all round plan.

Something I noticed today, not really terribly relevant but interesting none the less, is that the average option price based on trade value based on same value sizing is much lower than the average real option pricing based on historical trades. But I will ignore that for now and try another way of calculating potential profits based on historical trading numbers.

My previous option price average was $2.61.

My overall profit per contract was $19.

I have traded 196 trades to date.

Using a $1000 trade value:

- same sizing 3.8 contracts per trade or 744 contracts

(I should be using 3 as partials cannot be traded)

- same value is 6.9 contracts per trade or 1352 contracts

(6.9 is accurate as it is an average of trades between 2 and 12 contracts)

A) Same sizing yields $14,136

B) Same value yields $25,688

These need to be adjusted for commissions.

Old commission rate totals:

A) $5,388

B) $6,604

New commission rate total:

A) $3,840

B) $4,752

A note about the same value contract count:

Same value trading is higher due to the lower option prices allowing to trade up to 20 contracts per trade. The range, adjusted to fit the $2.61 average price, leaves me with prices from 81 cents to $4.06 possible and sizes from 2 to 12 contracts. Figuring that there are about 10 trades per price level to spread it out evenly allows a trade size average much higher than using a straight $1000 divided by the average price. As a result a 12 contract trade will yield a higher profit than a 2 contract trade based on the 19 cent average profit. The trouble with this may be that it artificially inflates the profits on the smaller sized trades as they may have typically smaller per contract gains. I am making the assumption that the same is true for the larger trades as 19 cents is a very small move in a $3 option. In fact that move on the smallest price in the range of 81 cents is 23.5% and in the highest range of $4.06 it is only 4.7%. Lately our targets have been in the 20% range for the daytrading... so these numbers are not that far off.

Jeff.

The hard truth about losses

Losses are not fun but they always provide lessons to learn from... it's either that or the lesson is not learned and the losses are repeated in the same manner as before. That usually means that there was a way to mitigate the loss that was either a result of ignorance or ignored in greed.

Of course there is over confidence, but that is a side bar of greed of it's own reasoning.

Enter the largest possible single day loss that I may be racking up this Friday. While I will not count it out yet I will learn from the potential loss as if it had already occurred.

This is primarily in the momentum trading account, which is now combined with the day and trend trading, but that matters little.

Last month I ratcheted my trade count up to 5 contracts per trade. I already had a number of positions of 3 and 4 and now a few in the 5 area. Then we entered some "second string" trades, basically averaging down but still counting the additional contracts as if they were a separate trade. These I did not enter as five contracts per trade but 2 or 3 contracts were added. All in all I end up with 17 separate options in play with about 104 contracts in total. This is about $21,000 in options purchased, most of which are expiring this Friday. Seeing as I have combined my capital and trades I can count all my profits together and know that this eats up a great big chunk of my total profits since this program's inception as that $21K could be a 100% total loss... although I think some of it can be recouped with some careful trade management assuming that the market, or at least some of the individual stocks drop in price by weeks end.

The lesson, which is more important than the loss, is that better trade sizing would have made this a much sweeter pill to swallow, or at least not quite so bitter.

Seeing as I like my spreadsheets I created one to track all of my momentum trades as if they were of equal weighting, similar to what I am doing with the daytrading now. This serves to make a trade returning 20% no matter the option pricing, return the same dollar value as any other trade returning 20%. This also keeps the maximum loss of any single trade to the same maximum loss of any other single trade.

Total trading profits to date = approximately $21,000

Current trades as if 100% loss = approximately $21,000 loss (Yah, Ouch!)

Trade size = $1,000 from inception total profits = $30,000 (without changing my daytrading)

Current trades as if 100% loss = approximately $11,000 in profits retained

This is due partly to the same valuation of each loss, nothing oversized but also to the fact that a smaller priced option would have the exact same weighting on the profit scale as any other option given a similar actual ROI. 20% of a $1000 trade of 50 cent options would be the same as a 20% gain in a $5 option... with some variation due to commission structure.

So, if I end on a sour note on Friday I will be re-visiting my trading sizing overall once again in order to determine where best to apply my capital in order to maximize the profit potential going forward.

I think that I will consider daytrading the primary method of trading for right now, concentrate on the short term in and out trades while aiming for that $500 daily average. If I use 15 possible concurrent trades and apply 80% of the trading capital I should end with a decent buffer and be able to increase the trade sizing gradually while reducing the amount of trading capital in use. At some point I will get back into the momentum trading with small trade value sizing once I have $5,000 that can be applied as 10 $400 trades (using only 80% in total)... perhaps a month or two...perhaps less.

Jeff.

Delta isn't all it's cracked up to be

I had a small lesson in Delta, one of the "Greeks" having to do with options. This one represents the expected option price change relative to the underlying stock price change.

For example, a Delta of 0.5 would indicate an expectation that if the stock price moved $1 the option would move 50 cents.

Today I was watching a position that was held overnight that was down about 35 cents with a Delta of 0.45. The stock was set to open up about $1.50 which would lead one to conclude that the option should move approximately 68 cents. Instead it moved 40 cents, which was enough to put the position in a slight profit and let me close it but demonstrated that the Delta is not a sure thing.

I have known this all along but I paid particular attention to this one out of curiosity. Often the option price does not move as expected as there is a supply and demand issue as well as a certain expectation of a stock's most likely move.

On the regular trading front trading is not so hot right now. The market is at a strange point and have been moving or oscillating while not following any particular pattern... at least not one that is very predictable.

We'll see how things fall out later this week.

Jeff.

Holidays are over...back to business

Well, the holiday is over. Five days of hot camping weather and no rain until the last day. Couldn't have ordered it much better.

Of course looking at the markets I could have ordered those MUCH better. That rally last week has driven my mostly put trades well into the red and most of them are expiring on Friday... we will see what this brings. Hope really has no place in the market so I will just wait and see what the numbers say.

I have consolidated all of my trading cash into one account over the break so now I can tinker with larger trades and decide how much to allocate to daytrading, momentum swing trading and trend stock trading on the fly. Currently I decided to use all spare cash for daytrading only. This week I will probably keep trades smallish... perhaps $1,000 per trade. Once we, as a group, get settled into the trading again I may ramp it up a bit more. I am aiming to be able to handle a certain number of concurrent trades and, once expiry is done with, I will apply that rule of thumb across all my option trading. I think that allowing for 20 concurrent trades in total with a 20% cash buffer should suffice.

In the future I anticipate that the cash buffer will allow me to skim profits even when I might have a poor month without directly affecting my trading power. The cash buffer may reduce during those times but the active trading capital should remain at least constant.

I don't expect that there will be a lot to talk about here for the next week so the blog will be mostly quiet. I have my plan dialed in now.

Jeff.

Making the consolidation move

I called Questrade services yesterday and got things rolling for putting everything into the margin account. They have changed a few things since last time I had to call anyone about USD being held in accounts.

Apparently they have changed how USD is dealt with in margin accounts now. If I hold CDN$ it still works the same, I borrow against the CDN and am charged interest for this as it just uses the CDN balance as collateral. For me it is silly to do that only to incur a useless interest charge when I can just always use USD anyway.

So my TFSA balance is on it's way to the margin account. I started out also transferring the option positions as well but there was some hiccup in that transaction. I will have to just transfer those once they are in cash.

I realize that I will not be able to put any cash back into the TFSA until January and I may do that if I am still trading with Questrade. I anticipate moving over to Interactive Brokers and there are no TFSAs over there anyway and this lets me double my trading capital to boost my gains. I may have to pay taxes on the profits but those taxes are less than half of the more than doubling of my profit margin. I talked about that before and it would take some time for the TFSA to catchup with the margin trading based on the current limitations. Besides, I plan on trading stocks at some point and margin will likely be needed as well as being able to short stocks.

I am heading off camping for the next week so there will be no trading until the 12th, nor will there be any blogging until then either.

Jeff.