Saturday, July 26, 2014

bullet-proof investing

the basic idea of bullet-proof investing is to put some money in safe long-term fixed interest instruments and then use the interest that will be paid to you eventually as a budget to play the market now. i get this idea from the wall street journal website: how to build your own annuity

so what the wsj is talking about is:  

  1. buying a 10-year cd. i find that i can buy a 10 year cd in my ira brokerage account at an apr of 3.30% in units as small as $1,000. cd's are fdic insured and are just a notch down from treasuries in terms of safety.  there are issues that one might fuss about, such as early withdrawal penalties, but i plan to scale-in a little at a time so the impact of that is minimal. scaling-in also gives me the ability to take advantage of what i anticipate will be an era of increasing interest rates.
  2. calculate how much interest is thrown-off. there are many online cd interest rate calculators (such as this one) which tell me that, at 3.3% apr, $1,000 will become $1,387 after 10 years. thus, there is a budget of $387 to work with, (which doesn't sound like much but read on...)
  3. buy a broad market index etf or mutual fund. it so turns out that my brokerage offers vanguard's total stock index etf (ticker:vti) on a zero-commission basis. thus, it is totally efficient for me to buy shares in one'sy-two'sy amounts. vti last traded at about $102, so, to be 100% bullet-proof, i would buy 3 shares of vti for every 1k of fixed interest. that way, even if the whole stock market goes to zero, i come away slightly better than break-even.
however, that is over-insurance, imho. really, if the whole stock market goes to zero then it would only be because there was a calamity the likes of which the world has never seen - perhaps not even the us government could survive such a disaster to make good on fdic insurance. 

a more likely bad outcome, one worth protecting against, would be that, perhaps, the market gets chopped in half. so a 95% (about 2 standard deviations) bullet-proof strategy would be to invest twice the interest or $784 or, say, 8 shares of vti. this worst case scenario looks like this: in 10 years $816 invested in vti drops to $408, while the cd matures yielding $387 and i am down only $21. as wsj points out, the more likely outcome would be that vti doubles (a 7.2% apr by the rule of 72) in 10 years and this scenario looks like this: in 10 years $816 becomes $1632 and the cd matures yielding $387 and i am up $1,203, or a gain of about 68%.

for your pup's, maybe they save $100 week from some employment activity in a small brokerage account. after, 10 weeks, they could buy a 10-year cd at the 3.3% rate. then, for the next 8 weeks they buy 1 share of vti per week, commission-free. after 8 weeks of that they switch back to saving cash for the next 10-year cd and so on. 

also, vti is optionable. so once 100 shares are acquired one could then sell call premium to lower the cost basis. it would take only $12,500 of 3.3% cd investment (less at higher rates) to reach this level. furthermore, vti, pays a 1.7% dividend, which might be dripped to produce gains on a generational time-horizon. in any case, after 10 years the cd will roll-over ... lather, rinse, repeat!

Saturday, July 12, 2014

a little x was good for me

united states steel, stock ticker x (what were you thinking!?), is a psar-search star that i did well with recently. let me draw you a picture:
over the preceding 52 weeks, simulated trading for x on my optimized psar signals made $4,106 in 7 trades that each bought or shorted $10,000 worth of x.

on june 18, the optimized psar reversed and went long (simulated buy of 395 shares.) on monday june 23 i noticed a recent psar event on x and decided to live-trade x to the long-side. to get long on x, i bought a call spread by simultaneously buying the aug1 24 calls and selling the aug1 28 calls. i paid $2.00 for this spread and then entered a good-til-cancelled order to sell at $3.05, about 50% of the maximum possible gain in this trade. my risk was only the  $600 (=3 spreads * $2/spread * 100shares/contract) i paid for the spreads.

on july 11, just before the close, the trade hit my target price and i closed the trade for a 48% gain (net of commissions.) here's an image of these trades from my account statement.
the stock equivalent of this position would have been about 120 shares (=0.4 delta * 100 shares/contract * 3 contracts) and would have cost about $3,010 at the open price on june 23 of 25.08. if one were prescient enough to sell the high of 28.3 on july 11 then, maybe, one could have realized a 12.8% gain (~$385) but at 5 times the risk.

want my psar settings for x? come to the psar-search page where, for a modest fee, you can buy optimized settings for the acceleration factor/limit input parameters to the standard psar indicator. you can use those parameters in any trading platform that provides the psar indicator or in my sdi_psarstgy (free), pictured above, on the thinkorswim platform, which will provide an on-going back-test analysis as well as the indicator.

Thursday, July 10, 2014

nugt, psar-psearch superstar

nugt just threw a buy-signal:
psar-search bidirectional trading on nugt returned 130%
nugt is a psar-psearch superstar. over the preceding 52 weeks, simulated reversal trading on the psar signals using my psar-search settings made $12,979 in 36 trades that each bought or shorted $10,000 worth of nugt - almost 130% gain and that's without reinvesting the profits from preceding trades. 

to get long on nugt i bought a call spread by simultaneously buying the july 46 calls and selling the july 51 calls. i paid $2.29 for this spread and by eod it was trading for $2.75. i am targeting $3.70 which is about a 57% gain and about 50% of the maximum profit possible in this $5 wide spread.

want my psar settings for nugt? come to the psar-psearch page where, for a modest fee, you can buy optimized settings for the acceleration factor/limit input parameters to the standard psar indicator. you can use those parameters in any trading platform that provides the psar indicator or in my sdi_psarstgy (free), pictured above, on the thinkorswim platform, which will provide an on-going back-test analysis as well as the indicator.

Sunday, July 6, 2014

how i'm trading psar-psearch

in this crazy market the implied volatility is nearing record lows and seems like it will be there forever ... or at least longer than my sanity can hold out. when iv gets this low the direction-neutral credit strategies stop being a good reward for the risk. i feel that i need to choose directions in this market and i am not good at that and i am worse at recognizing when to change directions. this is why i latched on to the psar-psearch idea because it gives me a reasonable way to pick direction and when might be good time to re-evaluate.

now, one can trade the psar-search optimized signals as a pos (plain-old-stock) trade but i prefer the option debit spread because it is a more efficient allocation of capital. in a debit spread one is usually buying an itm option and selling an otm option and paying upfront for it. here's how i pick strikes and manage the entry:

  1. look for a 70'ish delta strike to buy. the range is flexible it can be 60, it can be 80 but a strike or two in the money. the expiration can be 2 weeks to 2 months away. note the extrinsic value of this option.
  2. look for a theta neutalizing option to sell. i look for an otm option that prices closest to the extrinsic value of the long strike. this is usually a strike that is about 30 delta.
  3. buy the spread for 50% of the strike width. i buy the spread if it prices for something like half of the distance between the strikes. a percent or two on either side is fine but more than that means i need to pick different strikes.
  4. 1% per trade. i size the trade to be at most 1% of my available option buying power. this is probably less than an optimal kelly-size but i need to sleep at night.
when executed properly i have a position that is approximately equivalent to owning or shorting about 40 shares of the underlying equity per spread but purchased for far less. this is because .4 is roughly the difference in delta between the long strike and the short strike and each option controls 100 shares of stock. to be sure, the upside is capped but i will almost always realize a large percentage gain in the spread long before i would see the same percentage move in the underlying.

managing the trade is simple:
  1. target 50% max gain. i rest a gtc order to sell the spread when it appreciates to 50% of the maximum possible gain. this should be a price that is about 75% of the distance between the two strikes.
  2. stop out on a psar reversal. don't go against the psar! it may or may not be chop, you just don't know. if one is looking at the psar when the market is open then the the psar stop that is in effect is on the previous candle to the forming candle.
  3. maybe reload the trade. if i made the target and the move is young and the psar dots are doing their parabolic thing and are something like an average-true-range away then i think about reloading the trade but i would hate to give back any part of a 50% gain chasing money left on the table.
  4. maybe take a reverse direction trade. reversing direction is a case-by-case decision. in this bulls-on-parade market i wait for confirmation to take a bearish reverse. by confirmation i mean i wait for a candle that undercuts the low of the reversal candle. fyi, this is how the acceleration part of the psar works, the psar stop gets more aggressive only when there is extension of range in the trade (and only up to the acceleration limit.) 
  5. two stop-outs and done. if i am stopped out twice in a row then i look for a different equity to trade. something is changing to cause excessive choppiness and it is best to let that sort itself out. possibly, the psar-search acceleration parameters are in flux as well. i could conceivably switch back to a neutral strategy but i would need to see the iv sufficiently high (>30% in my experience) to make that work.