October Monthly Review
DAY TRADING
This month I really started getting back into trading. Not just creating sheets and preparing to trade, but actually trading. It went well
What went well?
-Learning selling options can be a great way to make money consistently.
-Laid out thoughts on Job and Trading
-Trading Plan in stone. Accounts for entries, risk, management, and exits.
-Set in stone list of stocks to trade from
-Optionable
-Highest scores
-Rediscovering where I need to put my focus
What went wrong?
-Learning Pains
-1. To antsy to trade. Forcing trades, trying to make money, not waiting for good trades.
-Lack of screenshots. I am doing this now.
-Lack of focus.
-Being at work makes it tough. Things pop up, worries in back of mind. A few failed valid re entries past me from not even thinking about it.
-Failed concrete game plan for entry.
-Lots of reversal plays that were not showing signs of a good reversal. Internals has everything to do with it.
-2. Failing to respect internals.
-3. Larger than necessary losses because of starting too big.
-Rules in trading plan have fixed this.
1. I would get bored. Sitting at desk all day, sometimes no work to do. Im learning new fun things I want to try them out and put them to use. It was a discipline issue. I had finally had enough and built my trading plan. Here it is. If the market conditions do not meet my trading plan, I have no trade.
-So far progress is good. I havent made any mistakes relating to not following my plan.
2. Boiled down to discipline. I would see it, but like the chart and take the trade anyways. I kept failing to keep the low hanging fruit mindset in mind.
3. Plan the trade, trade the plan. Discipline again. Greedy mindset. Not looking at it as a low hanging fruit opportunity.
SELLING
By far and large, selling options on SPY and Q made up 85% of my trades this month.
I had 3 option buy trades, 1 stock trade, and 95 different sell trades. We will focus on sell for this review.
Stats
-$350
+$50 selling. $-350 buying. -$50 stock.
38 W
54 L
41% WR
67 Exp worthless (73%)
27 W hit 90% (69%)
Winners
Avg MAE -20%
Avg MFE +80%
Avg Risk $60
Avg win $62
Avg R 1.15
Losers
-Biggest losers cause
-Fail to have exit plan
-Ignoring internals on reversals
-Fail to exit on clear trend break
-About half of all options sold expired worthless.
-I sold ~$10000 worth of options.
-That means $5000 could have been in the bag had I let my wins go to 0, and tolerated the pain.
-Thats also with poor trades. Numbers would be way better had I 1. Taken trades I should have and 2. Managed them according to plan.
-Obviously its not as simple as hold every trade til close. That would have meant some of my losers would be a lot bigger. But this paints a good picture.
My profit target is 90%. How much did I miss but not letting it get that extra 10%.
-$136
-Not a huge deal. While going through this I also had a few instances where market got shaky and I bailed and options exp ITM. So had I held out that extra bit I would have given back more than the market would have given me. 90% rule is here to stay.
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Numbers are fun here. Winners Line in the sand is -20% 70% of my wins never went more than -20% against me. Half of them only went -10% against me.
12 Wins never went negative. Only 30%
Those 6 wins that hit -50% accounted for $300 with one of those wins making up half of this.
Those 25 losses that hit -50% account for $1300 in losses. That extra -30% only adds another $100 as well
It is not worth to hold that past -50%, and the difference from -50% and -20% is so small it makes it means I can really reduce where im putting my stop.
This means rules change. Where I place my stop and risk need adjusting. Down in Adjustments Section.
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This also leads to selection of strike. A sold ITM option has a much higher delta that will hit that -20% faster than an OTM sold option. Not much faster, but faster.
Majority of my sold options have an average of .33 delta. 9/10 this is just outside HOD/LOD or very close to pivot.
Putting all of the above together, my selection is good, but I dont need to give the trade that extra time. Despite half my trades exp worthless, it still is not worth that risk to hold past -20%. This means I can actually trade higher delta options. Which is good and means higher prem.
Just OTM, 45ish delta, and cutting losers sooner than later to respect the fact that my data tells me only half my winning trades reach -10%.
THAT means, that my stop needs to be even tighter. Higher delta means much larger loss with a -50% rule.
I will give myself 33% in the meantime as I collect more data towards the end of the year.
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It is odd that every time I do a study on my trading, it always tells me to cut losers short. Not like we didnt already know this.
I thought that when I switched to selling options, it would be a way for me to hold longer. To allow the trade more time to pullback. But clearly the numbers are telling me thats not true.
Because once again, your best wins should always be in your favor and not move against you.
That mainly has to do with my entries. How I enter my trades. I do not just get in a trade, I wait for a turn. Sometimes a breakout. If ive learned anything so far, its that selling options allows me to enter on breakouts a bit easier. Its a time thing. Theta decay crushes the buyer but rewards the seller.
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I believe I may have been too focused on expiration. Now that I see my performance stats, it is clear that I dont need to focus on exp and I need to focus on prem. This is how I manage my risk by keeping my losses small, trade my data, and keep the trades on when I should.
I shouldnt enter my trades with the expectation they should expire worthless, I should enter them expecting it to move in my favor immediately, and for trend to continue. Exp worthless is just an added bonus. After all, I am a day trader.
I enter in at trend creation points. And as long as that trend continues, I want to be in. I have warning signs in my trading plan to exit early. It isnt about betting that the market wont close at X, it is betting that the trend will continue. And as it continues, Prem keeps falling, and when the trend breaks against me, because I have time on my side, I can 1. let trades go longer knowing a pullback will not kill my gains, and 2. exit with still a good win, and exiting primarily when my idea/thesis is no longer valid.
Risk isnt just on losers. Its also on winners. When you buy, theta is your enemy. Pullbacks kill your gains. You can be up 1% on the underlying, but breakeven on the option, If you decide to hold through pullbacks. By selling instead of buying, theta is your friend. It allows me to hold through those pullbacks. I manage my trade better because you should hold through pullbacks! At least if thats part of your trading plan. Which mine is at trend creation points, I need to have that trade on as long as the trend is in favor.
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If option hits x what are chances it exp worthless?
Of Trades reaching X%, X exp worthless
- -100%, 100% exp worthless
- -50%, 78% exp worthless
- -33%, 77% exp worthless
- -20%, 72% exp worthless
- -10%, 73% exp worthless
- 0%, 75% exp worthless
-+25%, 77% exp worthless
-+50%, 82% exp worthless
-+85%, 82% exp worthless
Fascinating. That 3/4 steady across all. There is no one level here that is a clear hold for expiration. And if there is no clear answer, then my risk is unchanged.
If a trade never goes negative, theres a 75% chance it expires worthless.
If a trade reached -50%, theres a 75% chance it expires worthless
If a trade reaches +85%, theres an 80% chance it expires worthless
Nothing here tells me I need to worry about letting it go to expiration. This just confirms what I have stated about being a trend trader.
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If the majority of options I sell expire otm and at 0, thats a lot of potential money im missing. But that 1/4 that doesn't expire worthless would eliminate who knows how many winners. If I looked at this and decided to actually increase my stop and not tighten it, would I catch more winners? Yes. Would my average win $ increase? Yes. Would my average loss increase? Yes. And dramatically. There are instances where my trades, if I am really offsides and wrong, I am down points on the underlying. And with an average win of $60, the average loss would head to triple digits. And the one or two a month that I really let go against me would wipe weeks of gains. It isnt worth the risk to look at these numbers alone and set risk based off of it. But it is something to keep in mind.
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I must remember. My trading is not about betting the stock will not expire above or below a strike, my trading is based on trends. Specifically Trend creation points. When I look at this data I must keep risk management in mind. The trend comes before the expiration. If I dont have the trend correct, it very well may expire ITM. Therefore I must respect the trend above all else.
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Putting all of this information together, I also need to create a 'lock-a-win" scenario.
I would like to make a rule such as 'if +50%, stop to breakeven or if up +85% stop to 50%' but Im not sure I can get there yet.
Currently, the only way I get out of trades is if the trend breaks, and internals along with it. If those 2 things dont happen, I am holding the position.
The problem is getting out ahead of time if the chart and internals are obviously calling for it.
If I am long from LOD and SPY hits vwap, starts failing to hold above it, and internals, while trending higher, are also failing to make HH, do I really need to wait for the chart and internals to break?
BUT now with my 'trades reaching x and expiring worthless data, if I have the following in my favor, wouldn't it make sense to hold through the 2 breaks?
-Entry on diverging internals
-Confirmed internals convergence on breaks in favor
-Trend continues and makes HH and HLs
I think this is a sacrifice I have to make when selling options. Remember theta is my friend and time passing while trend in my favor is a good thing. But time passing while trend is not in favor is also a good thing, so long as price doesn't move too far against me. And when it does, thats when it can become a very bad thing.
Again I believe it goes back to the bold paragraph above. I am a trend trader. So long as the trend remains, I need to be in the trade. If I give up 'too much' on waiting for that trend to break, then so be it.
Must think about making good trades. Not about making money. My data tells me to hold through. My mind tells me keep the win.
Do you want to be right or do you want to make money?
If I want to be right I would how through to expiration.
If I want to make money I would cut my trade according to data. I would exit when the market tells me trend is not longer valid.
One thing I haven't gone over yet, is range break trades, and reversals. All of my data has included both. Now I must separate it.
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REVERSALS & RANGE BREAKS
These are my 2 setups.
Right off the bat, Reversals make sense to have cut win rules be tighter. They are trades going against the main HTF trend. When the trend inside the HTF trend breaks, it makes sense that it would continue in the direction of the HTF trend, which I am positioned opposite against.
Therefore reversal trades should not be planned to hold to expiration.
Super strange numbers here. A bad loser has a better chance of expiring worthless than a good winner does. Ill need more trades and time for this to build out.
Reversals have to be short lived. Unless they are after an all day trend lower. Then in those situations, a hold to exp is in the cards.
But if its 10am and SPY just made a new LOD in a straight line. I can get a reversal setup and it is valid to take. But it is not valid to hold. My reversal is just the HTF pullback for another move.
That is a rule that I have to keep in mind.
Lets focus on short move early morning, I think a good rule of thumb for now is underlying targets. Take half at target, take rest on trend break, internals break. There is no guarantee and not enough information or time to leave these reversals on.
All day trend reversals. These can be left on and treated same as range plays. Only exit on trend and internals break. If none, we leave on til 90%
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Range Breakaways
Finally some numbers that make sense.
These are more like my stock/buy options I would take. Stats very similar too.
Avg win only goes -15% against me.
Avg loss only goes +15% in favor.
75% of wins dont go more than 10% against me.
-I am right, and I am right right away.
-66% of wins dont go more than 2 ticks against me.
-8% of losers go +25%
90% of all losers go -20% and more against me
-Huge note here.
This calls for some rules change.
33% risk is too much. Numbers tell me not worth the noise or letting it work.
20% is good to start.
+25% MFE is also reason for breakeven stop move. Only 3 of my 32 losers hit +25% MFE. If a trade hits +25% its safe to say its going to be a winner.
These types of trades were always what I was best at so it is good to see clean clear numbers here to confirm that.
These are also the types of trades to let ride to expiration so long as the market calls for it. Trend remains intact, so does the trade.
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COMPLIANCE NOTES
Big theme word in my notes is "Clear." Best winners are coming from clear trades.
3 main compliance mistakes
-1. Entering on chart despite internals not being clear
-Too early, FOMO. This is getting in against my trading rules.
-2. Size too fast
-Lack of discipline. Greed. Wanting it all right here right now.
-3. Failure to bail on trade when internals shift against me, and trend breaks.
-Got caught in a lot of squeezes/flushes. Keeping the trade on through warning signs when clearly my thesis was no longer in play.
All of these stemmed from a failure to have a trading plan from pre-trade to exit. The mistakes became less common once I had my plan in place.
There are times to focus on selling options
-Range bound, low vol, lack of trend follow through.
There are times to focus on buying options/stock
-Volatile, clear trend, trend respect.
INVESTMENTS
I cut a lot of positions this month. Market is not hot, sentiment is breaking yearly trends lower. This is not a clear cut time to add and get aggressive. I have hedges on through bought puts, and I have cut my losers on clear breakdowns. The names that remain are the winners and I will keep adding to them as time goes on.
This is also the time to look at the highest quality stocks and see if we can buy them on dips.
As of Oct 31, MELI is only re entry. If market wants to bottom here this is great spot to see that turn. Will take a week or two to know for sure.
We had major quarter long trends breaking to the downside. A lot of red in my sentiment tracker across HTF. It will take time for this to recover and prove market wants higher.
SUMMARY
-Low Hanging Fruit Mindset
-Wait until its obvious
-Ideally we want trades to expire worthless, but we know
-75% of my trades expire worthless
-25% that dont would kill all gains and more if held.
-I am a trend trader, not an expiration trader.
-It is not worth holding and waiting and finding out
-Get out at 33% if wrong asap, 25% on breakaways
-Get back in on break or if turn appears.
-Breakaway stop to breakeven can be after +25% MFE. 92% of losers do not reach +25% MFE
-3% of my losers reach +50% MFE
-80% of my winners reach -33% MAE
-These are the inflection points.
-"Clear" Is keyword in notes of all winners.
ADJUSTMENTS TO TRADING PLAN
-Selection
- ~50Delta and under
-Risk
-Risk is set at 33% against me on premium on REVERSALS. 25% on Breakaways.
-This is a hard stop.
-This allows room for valid pullbacks and ensures im not shaken out on noise.
-It allows me to stay in when internals are still in favor, and wiggle room for adds.
-When I am down -10%, this means I need to think about warning signs.
-Too early?
-Entry with internals not really in favor?
-Trapped on chart?
-Internals building above/under 0.
-Reversals
-All day trend reversal, or short move reversal
-All day trend reversals can be held to exp
-These are trades to hold.
-Short move reversals must be short lived and exited based on underlying.
-These are not trades to hold.
-Half at target. Other half on trend break or internals break and follow through.
-Warning signs early exit are internals break and follow through.
-Breakaways
-Stop to breakeven after +25%
GOALS
-No trades should reach -50%
-Avg Loss MAE ~33%
-Recognize differences in reversal setups based on time the trend had before entry.
-Stop to breakeven after when on reversals? Need more data.
-More data on spreads.
-More data on when to go stock/buy options as opposed to sell.
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