6507% Trade Return!

I have always said that it is far easier to make a few great trades with fantastic returns, than to grow one's capital consistently.

Below is my best % trade return yet.  I bought a Put for $1.40, and sold at $90 and $95 (say average at $92.50).   The % return = 92.5 / 1.40 - 1 = 6507%.   This is what Peter Lynch calls a "65-bagger".    Note I sold this the week prior, making this trade approximately 1 week holding.   Here are the relevant screen shots:
  

Does this mean I am a better trader than Warren Buffett?

Hell no!  (keep reading).

Does this mean I am a better trader than the Market Wizards?

Hell no again!  (keep reading).

Is this a rare result?

Perhaps.   But to be honest, I have only started trading /ES for 4 months, so, it cannot be that rare if a 4 month old /ES trader can produce this type of results *grin*

(Disclaimer:  This is actually misleading, as total years of experience trading is perhaps closer to a decade and I probably have made thousands of trades in my lifetime ... but for the /ES instrument itself, it is only 4 months experience).

To be honest, a few trader in Daniel's FB account also reported the same thing.   So, it's not very rare.  I believe anyone who trade the same credit spread system before the stock market corrected violently are very likely to get the same type of result if they are disciplined to repair the trade at the appointed time.

A non-directional trade that went wrong

Actually, this trade started off as a non-directional trade that intended to earn very little and risking a lot *grin*  (Terry:  take a note of this)

It is still positive expectancy because normally, the probability of winning is very high.  But in this case, even high probability can result in a loss.

You see, what happened is that when the index was 2100 and dipped, I sold a 1970/1940 Bull Put Spread for income.   At the time, the income looked safe.

What transpired was amazing and totally unexpected. 

On Thursday, markets start to drop violently.   I had to repair the above trade, because as price drops, Margin expanded and it became a huge concern for me.  During that time, I discovered that if I closed just the Sell Put leg, and keep the Buy Put leg, my Margins would improve, and so, I did just that.  In other words, when I closed the Sell Put leg, I effectively went from "non-directional bullish" position to a "directional short" position.

The truth is I did not expect markets to fall so violently the next 2 days on Friday and Monday. 

But it fell and it hit the low of 1831.   When I saw that, I closed the Put very near the bottom of 1831, at $90 and $95 .. I recalled seeing the price exceed $100 in split seconds, before pulling back very fast.

The actual returns are less than that shown above, because I still have to net off the earlier loss prior to Thursday.   But that trade was a huge % winner still.

Is this repeatable?

I hope so, but market must cooperate, otherwise, nothing I can do.  

It is definitely much easier to do this on the short side, than on the long side.  Why?  Simply because market takes a long time to grind upwards, which is bad for options because options tend to loses value over time, plus options also loses value when VIX falls.   However, on the short side, markets tend to crash very fast plus, VIX expands (which helps options values to explode temporarily, even for a few seconds/minutes - enough to trigger the anticipated Limit Sell orders).


My Next Plan on the next Bull market high

So, after experiencing this, my strategy for next year is that if the Bull market is still intact, then, I will wait until market makes new highs.   At these new highs, I will buy very far OTM options that are most likely to expire worthless.   But I have seen how these have the potential to create 65 baggers.   I can be wrong 11 out of 12 months in 2016, but if I catch just 1 month, I will be wildly profitable.   It is not easy being wrong 11 months out of 12 months, but I think this is possible and likely in this ageing bull market.  I don't expect the same opportunity to present itself in 2015.  It will take at least a few months for the market to grind its way back.   A new higher high is unclear at this stage, although, in 2016, I believe it has good chance of doing so.

Can it be done on the reverse side?

I think so, but it won't be that spectacular for a couple of reasons mentioned above (bull markets takes time to grind to a new high, but option loses values due to Theta decay).

Today, when markets were below 1900, I took the following trades:

Basically, I'm betting a small amount of monies, that market has bottomed at 1831, and will slowly grind its way back upwards.   There is a very small possibility that it might repeat Oct 2014, where for the next 20 days it went V shape up to make a higher high, but very unlikely although no one knows.

To take advantage of both possibilities, I bought 5 net Calls of 2000 with 23DTE, and 5 Calls of 2025 with 51DTE.   My average cost is $8.9 and $10.9 respectively.

The costs of these options were actually FREE for me.   This is because I financed these by selling very far OTM Put Spreads, lots of them.   So, if markets has indeed bottomed, then, these should expire worthless and the credits offsets the premiums above.

So, if market stayed flat, whilst I would lose 100% of the above premiums, they did not cost me any monies since it was Market's monies in the first place.

So, what's the Trade Plan?

Already entered, so, do nothing.
No Stop Loss (since Market's monies).
Wait until either expiry, or when /ES hits 2000, whichever comes first.
Ignore daily P&L
Ignore large unrealized gains turning into losses.
Ignore losses turning into large unrealized gains.
Just focus on either expiry or when /ES hits 2000, whichever comes first.

Isn't this like playing the Lottery?

Yes, many similarities.
Psychologically, it can be the same too.   We think that we've lost the monies spent on these premiums, as we already bought the lottery ticket.

Normally, I don't encourage lottery tickets - the vast majority of the time, markets will ensure that these lotteries will expire worthless.

However, we now have a unique opportunity with the huge market fall in such a short time.   It is during these exceptional times, that I think it is worth a small punt.

For me, it is Market's monies, not my money, so, it's like a Free Lottery ticket.  If win, great.   If lose, nothing to cry over.

What are the likely outcome of these trades?

Option chain thinks there is 85% chance that all these trades will go to zero.

Do I recommend doing this?

Only if you can accept the scenario that all this might go to zero.  If you can't, don't do it.  And I don't recommend doing this every month from the long side too. 

So, what's the payoff?

First, I think Option Chain probabilities are too pessimistic.   I think the odds of me losing everything is perhaps 50% only.  The other 50% is positive value, perhaps majority chance out of that 50% being profitable.   And if profitable, the % returns can be hugely variable, from 0% to 500%-1000% returns, maybe more if market is very, very cooperative.   A 5 to 10-bagger is very possible, if the 6507% example shows.   Overall, taking into account a 50% chance that it will expire to zero, the trade still have a positive expectancy.

What if Volatility / VIX contracts and the premiums contracts?

This is actually one of my biggest risk, that /ES makes a very, very slow grind upwards, not quite reaching 2000 by expiry date.   Then, I lose all the premiums.

Here, I'm taking a bet that the /ES will end the year at around 2050, which means the /ES earned zero returns for 2015. (/ES closed at 2054 on 31/12/2014).

This means for 2015, the US markets have ZERO returns.   What's the chance of this happening?  Perhaps 50/50.  I think no one really knows.

Why no Trailing Stop Loss?

Because the market will make it extremely difficult for anyone who bought at the bottom, to get to the new high.   It will show huge returns, then, falls back down a lot, before going back up.   A trailing stop loss will just be stopped out unnecessarily.

So, the strategy is easy - either huge returns, or zero returns.  Whatever the outcome, I don't care!

Why not bet huge?

There is still 50% chance of losing everything :-)
Yes, it means my capital will not really grow that much, even if this is a 10-bagger ...
This and the 6507% trade returns are only for "bragging rights", when we sit in the pub and talk about "fishing for the giant fish", and some of us might tell about this really big fish that was almost caught and got away. 

This is not a serious method to accumulate wealth.
But it makes a great fishing tale!

Cheers, and happy trading.

Always trade safely!

Discretionary Trade Idea: Sell VIX

Consider below. 

First is 1 year Daily chart of VIX. 
Question is: "Will it stay this high 1 or 2 months from now?"
First impression:  "It looks unlikely to stay this high isn't it?"

 

Second is 20 Year Monthly chart. 

Question is: "Is it certain to fall 1 or 2 months from now?"

First impression:  "Maybe, maybe not?".  Nothing is certain in trading.

 

Possible VIX Trading Ideas:

1. Sell VXX ETF if you are not Options enabled. 

• Looks to me, current price of $20.65 is not a bad price to start selling.
• Challenge is loss is not defined - setting a cut loss point will most likely turn out to be unnecessary.   However, if the current meltdown turns out to be something worse, your loss can become very large, and your broker may force liquidate your position at the worst possible time.
• Key Success Factor:  Small position sizing.

2. If you are Options enabled, consider either buying VIX Puts, or sell VIX Call Spreads.

Consider the Options Table with 29 DTE (Days to Expiry) below:

1. Buying Puts

My hesitation is that the Options Market Makers prices VIX to perfection.  

a. NTM Strike ($29).
- Extrinsic (Time) Value is very high at $9.5, i.e. it requires VIX to fall to $29 - $9.5 = $19.5, before the trader breaks even.  
- Still looks better than 50/50 odds, but odds are the returns are unlikely to be specatuclar.

b. OTM Strike (e.g. $25).
- Outlay smaller ($7.2), but break-even point is lower, at $25 - $7.2 = $17.8 at expiry, before the trader breaks even.
- Still looks better than 50/50 odds, but not much higher.

c. ITM Strike (e.g. $35).
- Higher outlay ($16 approx.), but break-even point = $28.03 - $9 = $19.03 which doesn't appear optimal compared to 1.a. above.   Most likely temporary mispricing.

In short, if you want to own Puts for predefined risk, the odds of winning appears better than 50/50, but is not a certainty as VIX must fall back down by nearly a third, before the trader breaks even.   Otherwise, he runs the real risk of losing money, even if VIX falls back down say 25% at expiry.

2. Selling Bear Call Spreads

This is a low return, but extremely high probability trade, with predefined risk, and is my favourite method.

Yesterday, at close, I sold a small amount using 2% capital as Margin the $26/$28 Bear Call Spread.  The Premium is approximately $0.30 ($0.35 not executed).   This is approximately 15% maximum returns in 24 days, if VIX falls below $26 by expiry date.

Here is a good example where the Option Chain and me have 2 very different views on the probability of winning this trade by expiry.   Options market thinks there is only 53% probability of winning.  Whereas I think it is closer to 90%-95% probability of winning.   Since we both have different views, I decide to trade 2% of my capital against the market by selling the Bear Call Spread.

Note expectancy = 90% win rate x 15% return - 10% win  rate x 100% loss = 0.35R, which looks reasonable to me.   If your win rate is higher like 95%, then, the trade expectancy is even higher than 0.35R. 

3. Alternatives

Look for "bottom" in S&P500 instruments.  The main risk is "catching a falling knife".  What looks cheap can become cheaper.  However, if you have a longer term strategy to capitalize on this with predefined risk, it can be a positive trade expectancy.

At this juncture, I think selling VIX Bear Call spreads is a higher probability of winning trade, until we see clear reversals in the S&P500.  It means safer to wait for higher prices in general.   A small speculative capital (risking no more than half of what you normally risk) can be utilized to try to catch the S&P500 bottom (such as naked Calls or Debit spreads) - the #1 key success factor here is that if S&P500 crashes, your loss is predefined and limited.

Conclusion

There are no certainties in trading.  
Consider this as just an idea.

Is trading a "linear" business?

In layman terms, "Linear" here means "If I can grow $10,000 capital to $20,000 in a year, does this mean I can grow $1 million capital to $2 million over the same period?"

Unfortunately, for most people, the answer may be "No" (or "not yet").  Exceptions exist, but they are rare and extremely few, even rarer than those able to grow $10,000 into $20,000 in a year.

Why is this?

There are several reasons, but the majority relates to the Trader's Own Psychology.  It is not the only reason, but is a major one.   Here's why.

"It's Small Money" - Net Worth Constraint
Imagine an individual with $500,000 Net Worth. 

He decides to risk $5,000 as capital to trade Options. 

It is actually not uncommon for this individual to double the $5,000 capital to $10,000 within a year or less trading Options.  For example, he could risk $2,500 buying an OTM option and make 100% returns within days.   Do this twice, and he already made $5,000 profits and so, made 100% returns.

In short, doubling $5,000 to $10,000 is not hard, when your Net Worth is half a million.  Worst case, if you lose $5,000, it is only 1% of your Net Worth.   Many traders have done this including myself several times.  I can tell you, that it doesn't mean you will be able to grow your Net Worth at the same rate.

Now, imagine the same individual use the same process of 2 trades to try to double $250,000 to $500,000.   Can this be done?

Of course, anything is possible, including the outcome of success, but in reality, that would be gambling.

The reality of trading is that the outcome of any one individual trade is unpredictable.  

In additon, the consequence of a loss in that situation would be disasterous. 

OTM options frequently expires worthless.  If he lose 100% of the premium, he would lose half his Net Worth.  So, at least, we can say that his approach to double $5,000 into $10,000 is NOT immediately applicable to double $250,000 into $500,000.

In short, it is precisely this reason (Net Worth constraint) combined with the unpredictable nature of the individual trade business, that the trading business is not infinitely scalable.  Professional traders always risk a small % of capital on any one individual trade, and so, in practice, this becomes the practical limit.

Unable to handle the Volatility

This is a very common reason for successful experienced trader who trades a small capital.   I have also experienced this personally before more than once too.  The latest occurred a year ago when I was trading $50,000 capital relatively decently.  Using a positive expectancy trading system, in my first month, by risking approximately 1% to 1.5% capital per trade (or $500 to $750 per trade), I was able to grow that capital by nearly 5% in a month.   Losses did not bother me too much, I was able to consistently put in one trade after another with relative discipline since when I won, I tend to win larger than my losses.

A month later, I got greedy.   At the time, I was trading other systems as well, and they did not perform as well as this particular system.  So, I decided to stop trading every other system, and allocate $250,000 capital to just this system alone - this is a 5-fold increase!

Whilst I had a lot of trading experience by then (over 1000 trades), suffice to say that particular experience taught me that I could not handle a 5-fold increase at one go.  Instead of losing $500-$750 per trade which my psychology could accept then, each trade was potentially risking $2,500-$3,750.  At that time, I could have up to 7 open positions, i.e. my Portfolio Heat was 7 times $2.5-$3.75k, or $17.5k-$26k.   The daily volatility was FAR TOO large for me to handle, and in that month, nearly every night I could not sleep well.  And when I suffered expected losses, it was EXTREMELY difficult for me to put in the second trade.  There was tremendous emotional conflicts in many parts of my body.

So, there was no surprise that the experiment ended in failure, despite trading a positive expectancy system.   The immediate 5-fold increase was too large a shock for me, and I end up with a negative return in that month, even though it was a positive expectancy system.   The 2 key reasons are first, I could not continue to put in the necessary trade after a loss as promptly as I could with a smaller capital, and second, I was constantly battling my emotions which tried to micro-manage a winning position by taking profits too soon, since even +0.5R gain could already be worth two grand!  

That experience taught me a valuable (and very expensive) lesson, that trading is not a linear business, and the process of scaling up takes time, practice, and a lot of constant hard work.   Fast forward to 2015, I am glad to say, since then, I am now trading larger, and I am more comfortable today trading that amount, than I was when I was trading $50k capital.   However, it was not easy to get to here, and is one of the most difficult things I had to do to regularly stretch my comfort level over a very long period of time.

Tom Sosnoff take on this topic

Tom Sosnoff has been in the trading business for over 30 years.  If you don't know who he is, he is the guy that interviewed Karen the Super trader here in this video that I previously linked in my previous article titled "Two inspirations ....".   He is the cofounder of ThinkorSwim and "tastytrade" holding a very senior position in TD Ameritrade and was reportedly earned $84 million when he sold the ThinkorSwim platform to TD Ameritrade back in 2009.

I would encourage you to watch the interview #2 with Karen here - fast forward to 10:20, and listen to what Tom Sosnoff has to say:

"I promise you I ve been around for a long time … this is not a linear business … okay … it is not linear … what that means is … somebody can turn around $10,000 into $20,000 or $50,000 into $100,000 …  I have been spending 30 years just buried in this business … and not too many people have turned $42 million into $95 million … (he has never met anyone like Karen …)"

Trader Kingdom's take on this topic

Click here to see his take.  The key parts are:

"We say that trading is not a linear business and it defiantly isn't. This business is a grind and trading isn't for everybody .."

SMBU take on this topic

Click here.   The key takeaway are:

"If you can trade 50k in capital into 50k in P$L then this is very efficient trading. It may not follow that you can then turn 1m in capital into 1m in P$L. It is possible, if not likely, that your strategy does not scale from 50k to 1m. You may trade bigger size and then expose your trading to slippage, worse entry prices, etc. It may be harder for you to cover more positions at this increased capital if this is an adjustment you make to trade with more money ..."

Conrad Alvin Lim's take on this topic

In one of his many best-selling books called "Secret Psychology of Millionaire Traders", Conrad touch on this topic in quite detail from page 91 to page 95.   I can only recommend that you buy his book, and read it carefully.

He describes a process (using forex trading as example, but applies conceptually also to every forms of trading including stocks, options, etc. with some adjustments) to take a trader who is used to trade just 1 lot into 2 lots.   He describes a common pitfall (which I am sure he has seen many times with his students), when someone declares himself "consistent" and then goes from 1 lot to 2 lots and then failed.

It is clearly not a "linear" business - it takes a lot of time, effort, I would argue even more hard work than just growing $10,000 into $20,000 in a year (which is relatively easier to do).

Van Tharp's take on this topic

In my opinion, Van Tharp is probably the world's foremost trading psychologist who truly understand that trading is not a linear business, and whilst possible, it is not easy to break this barrier and it will require a lot of work.   He is probably unique in that he offers unique and specially tailored courses to bring his advanced students to a totally new level of performance but these courses are not cheap.   For example, his most Advanced course, the Super Trader course (which is targetted at turning a good trader into a "super" trader) is valued at US$120,000, and the Super Trader program that ran in August 2014 cost $47,250.

Yes, you can make it scalable, but expect to take a lot of extremely hard work.   There is no question in my mind that it takes much, much, much harder work to grow $1 million into $1.5 million, than to grow $10,000 to $20,000.

Conclusion:  Beware of the Marketing Hype that makes this look "easy"
There is no doubt that trading is theoretically and mathematically, a scalable business.   It certainly "appears" easier to scale up a trading business, than a physical business like a shop or restaurant since all you need to do is just fund a larger amount, and it appears "done".

However, "real life trading" is not that simple.

As you've seen from above, at least 5 other trading authorities besides me (Tom Sosnoff, Trader Kingdom, SMBU, Conrad, Van Tharp) who has been in this business for decades (and many more) will tell you that it is not easy to scale up, despite being a successful trader trading a smaller capital.

This would no doubt be contrary to many more Marketing materials that you will see over the Internet promoted by online services, sites and gurus.   For what is worth, my own experience has shown me that it is much easier to turn $5,000 into $10,000, than to scale up 5 times.

I wish you all success in scaling up your trading business when you are ready.   Expect and be prepared to work hard to make this a successful reality!

China Stock Market and my ASHR trades

Last Monday (6 July), I tried to bottom fish the sharply falling China stock market.  At the time when I alerted to monitor ASHR at pre-market which had closed the shortened week at $42.42 (2 July).

Why enter on 6 July?
At the time, the thesis was China stock market has fallen a lot from the peak of $55.19 down to $42.42, or more than 23% fall.   The technical definition of a "bear market" is 20% fall, although this clearly doesn't apply to China as prior to that, the run-up was very fast in too short a period to be sustainable.

Besides falling more then 23% then, it also appeared to be resting on one of several reasonable strong supports, which is around $42.   It looked strong, because it was a confluence of the 150-day Moving Average, combined with the 38.2% Fibonacci Retracement support off a major Swing from $21.07 low to $55.19 high that spanned over 15 months.

In addition, oscillators indicators was oversold (suggesting a large fall too far too fast, which usually but not always lead to a snapback rally).   In addition, the Options Implied Volatility had spiked up (which usually suggests a good time to sell options).  In addition, the higher volume suggests possible capitulation.

The only thing missing was a very clear divergence in momentum.  There was a tiny one, but not significant enough.

Going long was obviously highly risky, not something any reasonable person would recommend.   This is because we can never know how low the market can fall in a panic.   During extreme conditions, normal market rational behaviour does NOT apply.

My 6 July trade
In my book, this is a valid signal to enter the trade.   The 200-day MA slope is still facing upwards, suggesting the bull market in China "should" still be intact.   This was a very big dip.   It rested on strong support.  Momentum was oversold, suggesting a bounce.  It is definitely a valid signal, and so, I entered, without knowing what will happen next, nor do I care.

This is my trade on 6 July:

As we are catching a falling knife (which Masters always tell their student NOT to do so for very good reasons), I decided to play it safe by selling a Bull Put Spread for $35/32 strikes expiring in 46 days at the time.   I set the Margin to be approximately $3,000.   For simplicity, let's assume for this article that $3,000 is equivalent to 1% of my capital.   The gross credit I received was approximately $0.50.   This implies a potential maximum return of capital (ROC) of $0.50/$3 = 16.7%.   If the trade went my way, I would have earned nearly 16% return on the $3,000 margin over less than 43 days - it was not a bad trade.

I chose the $35 strike leg because $35 is quite far away from $42.42, nearly 17.5% "safety margin".    In addition it was very near $34 strong support, and a part of me "hope" and "expect" that buyers will come in at $34.   In other words, ASHR has to fall another 17.5%, before my strike was threatened.

As a small footnote, in hindsight, this was slightly too aggressive (driven by slight greed). The safer play, based on the charts purely, would be the $34 strike, but the ROC was smaller.   Still, it wasn't a grossly huge error (but still an error because instead of earning say 10% ROC, now, after repair, it is only 5% ROC).

What transpired next 3 days
The past 3 days was unbelievable!

The 17.5% "buffer" that I had was sliced through like a hot knife cutting through butter.   In just 3 days, ASHR fell and closed at $33.89, or another 20% fall in just 3 days!

Imagine that - after falling 23% from the peak, ASHR fell another 20% in just 3 days!

My "safe" trade that risked 1% capital is now losing substantially (relative to the credit).   At the time I sold the Bull Put Spread, I received a credit of $0.50.   Now, the Bull Put Spread was worth $1.55.  In just 3 days, I sat at an unrealized loss greater than 2R!

Is this a real loss?   When we sell Options, this is very common.   Options volatility is a very hard topic to master, but once you have a lot of trading experience, it is very common to experience temporary loss of 2R, 3R, even 5R and a few minutes, hours or day or two later, experienced a profitable position as price stabilizes and Options Volatility contracts rapidly.  Of course, we can never know for sure if the volatility would contract, but at all times, my loss could never exceed 1% capital - this was my safety Net, which allowed me to trade ASHR calmly, despite the 20% fall in the underlying in just 3 days.

My Trade Repair
As there is no longer any safety margin in my strikes, I had a decision to make.  

Normally, Masters will teach you to cut loss.   If you had done so, you would have been out of the trade at perhaps a loss slightly larger than 1R in practice, if you had keyed the trade into the system, allowing for spreads slippage.   This is not necessarily a wrong thing to do, as you would just then move on to another trade.

However, when selling Spreads, what I have found is that the Options volatility is very, very high, that such an approach tend to lead to negative expectancy systems - it is almost certain, during the life of the options, that some spikes will happen that will execute the Stop Loss, and nearly all the time, this stop loss is unnecessary.

There are actually much safer ways to "repair" the trade than the simple cut loss that you are taught in courses, but they are all more complex to learn (and unlikely to be able to be taught fully in a single class setting).   There are actually many methods.   One of the method is to simply go to a lower strike, for extra safety, which is conceptually simpler for Options traders to understand.   This is only possible with Options, and unfortunately, is not possible with Stocks (whilst keeping the same amount of maximum risk).

I decided to shift down $2, by closing the $35/32 strikes, to reopen at $33/30 strikes.   I decided to do this yesterday, because the cost of doing so is actually not very expensive.   Closing the $33/30 strike will cost me $1.55.   Reopening the $33/30 strikes will give me a credit of $1.20 approximately.   The net cost of the repair is $0.35 approximately.  As my original credit was $0.50, this now means that my maximum profit is now only $0.15 for a $3 margin, or 5% approximately over the remaining 43 days.   My philosophy is that a small gain is ALWAYS better than a big loss, so, I decided to do this repair so that I can sleep more soundly.

If you trade stocks, you will notice that despite being wrong by more than 20% (ASHR underlying fell from $42.42 down to close at $33.89, or $8.51 or more than 20%), my loss is only $0.35, or approximately $350 for this trade that risked $3,000.   How is this possible?

A full explanation is beyond this article, as it is too complex - you will need to learn Options first, and perhaps make at least 10 to 100 credit spread trades before you can really understand the mathematics behind this.   Suffice to say that sophisticated Options traders knows how to control their risk, which are not available to stock traders.

My Second System Kicks In
In trading, it is important to understand that we can rarely be always profitable when trading one system.   Every system has its drawdown periods.   It is important to trade more than 1 system, so that when market conditions changes, a second system can start to be profitable.

As I repaired the Credit Spread system trade following my system, the rapid fall triggered a second system, which is a straight Buy the Dip.

So, I bought a Debit Spread of $34/$44 which cost me $2.83, with a maximum profit potential of $10 if ASHR manage to close above $44 in 43 days time.   The RRR is greater than 3 times, and meets my criteria.   I bought 10 verticals for a total cost of $2.8k, which is nearly also 1% capital.  

In other words, the dip to the second Strong Support was so fast, that it triggered this second trade costing another 1% capital.   So, I now have nearly 2% capital committed to the ASHR trade.

I also spend another 0.3% capital in a slightly more aggressive trade to buy a Debit Spread with $36/$46 strikes for a cost of $2.45.   The RRR is nearly 4 times if ASHR close above $46.   This is also a good RRR.

Updates at the time of writing
I wanted to show you a screenshot earlier, but didn't manage to do so.   As I write now, Shanghai stock market rebounded 6% today, and ASHR in pre-market has gained +$4.43.   I don't quite understand why but my Options position has also been updated in one of the leg - this pricing might not be correct, but it states that I now have unrealized profit of $0.4k in my ASHR position.

Ignore the unrealized profit/loss reported here, because they will keep changing and be very, very volatile.  

The point is to note are the trades.   You will see that I now own the Safer Bull Put Spread for $33/$30 strike (i.e. if ASHR closes above $33, then, I keep all the premiums with 5% ROC for 43 days).   In addition, I now own 10 Debit Spreads for $34/$44 strikes (a bullish position that risk 1% capital), as well as 3 Debit Spreads for $36/$46 strikes (a bullish position that risk 0.3% capital).   The latter 2 trades have RRR of 3 to 4 times respectively, and are valid trades belonging to the second system that got kicked in when the first system lost monies fast.

Summary
My 10 reasons for sharing are as follows:

1. Options trading are not the same as Stock trading.  If you approach Options trading like Stock trading, it's like utilizing just 1% of the capabilities.  There are a lot more to Options that will take a very long time to master.

2. In Stock trading, ,you could be very wrong and suffer a huge loss of $8.51.  But if you know what to do and be conservative, you could reduce the loss to only $0.35/share.

3. When a stock falls from $42.42 down to $33.89 and rebound back to $38, the stock trader will still lose monies, if he still doesn't cut loss (it is not recommended not to cut loss in stocks).  However, as I've shown here, if you trade 2 different system, and know what to do, you could transform a losing position into a winning position without requiring the underlying price to go back to $42.42, and without necessarily increasing your risk to excessive levels.   You don't need the stock to go back up to $42.42 to break even.   In stock trading, you could "average down" and achieve similar break even points, but your capital at risk becomes even larger.

4. Timing is everything, just like stock trading.   The strategy above applies only to conditions similar to ASHR above where there is a choice of 2 very strong support and there is a very rapid dip that you could not predict the bottom, but either is equally likely to be the bottom.

5. Support & Resistance and momentum considerations are everything, just like stock trading.

6. The ability to cut loss whilst it is still small, is critical, just like stock trading.   If my second strong support does not hold, I would accept the 2.3% maximum loss in capital, and move on to another trade.

7. The ability to trade multiple uncorrelated systems, to fit different market conditions is important.  Otherwise, we cannot take advantage of the varied market conditions that is sure to arise.

8.  Position sizing is critical, just like stock trading.   When I first entered into this trade, my maximum risk was 1% capital, and I ended up losing only 0.1% capital as I repaired the trade.  If you don't take losses when it is small, it is sure to get bigger.

9. My second system triggered 1.3% capital to buy the dip.   If this trade turns out to be wrong, the maximum amount I could lose in the worst case scenario is approximately 2.4% capital (1.3% + 1% maximum spread loss + 0.1% cost to repair).   This is very acceptable for a trader.   Very likely, I will not allow the 1% maximum spread loss to occur.

10.  The odds of me being stopped out unnecessarily is almost zero, as I manually controlled my stop loss.   This breaks the rules of what Masters teach their students to key in their Profit Targets and their Stops, as most traders cannot monitor their positions.

In short, there is a lot more to Options trading that you are taught, or can ever be taught by anyone.   Much of my personal learnings are self-discovery, self-experimentation, learn very widely and thinking through the logic of everything you plan to do with trading and varied market conditions.   Still, the 2 systems above are actually still considered "intermediate" level, and not really Advanced level yet for Options in the States.   You can do much more with Options compared to the 2 simple strategies above.

Stay curious, stay hungry.

All the best.

Malaysia Stock Market and the Ringgit

As I trade primarily Options in the U.S. Markets, I have not looked at Malaysia stock market for a very long time as I no longer have positions here locally.  In light of the recent Wall Street Journal reporting here making 5 very specific transactions allegations involving our Prime Minister and Finance Minister AND he has not yet explicitly denied these specific transactions to be factually false, it seems to me that the financial implications to the country will become too great to ignore the longer he delays denial to the facts, and so, I decide to pull up the charts for the KLSE and the Ringgit to see where we are today.   I am surprised as both are not looking good for Malaysians.

KLSE chart

• This shows the KLCI over the past 2 years. 
• The important line for me is the slope of the Red Line, which is the slope of the 200-day Moving Average. 
• Unfortunately, it is now sloping down.
• In addition, the latest peak in May is now lower than the peak at the beginning of this year, indicating a lower high.
• Note the rapid crash since peaking in May - this is because when the slope of the 200-day MA is down, and the market makes a lower high, the right trading strategy then will be to Sell the Rallies, and this has occurred already.
• Selling the rallies continues to be the right strategy as long as the slope is down.
• Unfortunately, Malaysia stock market does not permit short-selling.   Trying to go long when the 200-day Moving Average is like swimming against the tide - it is very hard to be profitable.  The majority of traders will lose money over the long term if they keep taking the long side of the trade when the 200-day MA is sloping downwards.
• Perhaps a redeeming feature is that the Market looks Oversold, having just come off the bottom - the resistance test may be around the 200-day MA, which also looks to be near the 61.8% Fibonacci Retracement level visually.   If it is not able to make a higher high, it will test a lower low below 1700 again ....

Ringgit chart

• Again, the USD vs MYR over the past 2 years, with the same 200-day Moving Average line in red.
• Unfortunately for Malaysians, the red line is sloping upwards, which indicates that the Ringgit has weakened compared to the USD.
• In addition, the outlook on future USD interest rates is up over the next 2 years, suggesting possible strengthening of the USD over these period.  
• The trade now is to buy USD / sell Ringgit in anticipation of the continuation of this trend.

Implications for Malaysians investing in the local market

No one knows what's going to happen in the future. 

Having said that, what has served many traders well in the past is to respect the 200-day Moving Average slope.   It captures succinctly what happens to prices over the past year and more.   Nowadays, it is very rare to find a fund managers or serious traders and investors who never considers price charts - everyone is looking at the same chart.

Unfortunately, these charts do not paint a rosy picture for Malaysia.  In fact, it tells me to reduce/get out of Malaysia stock market, and reduce/get out of the Ringgit as both are weakening.  An overseas fund manager that stays in the Malaysia stock market risks a "double whammy" - continued weakening of stock prices, and continued weakening of the value of these stocks when expressed in USD.   It would be very hard to justify staying invested in Malaysia.

Worse is the recent 5 specific transactions levied at our Prime Minister and Finance Minister.   Unfortunately, he has not explicitly denied the facts of the 5 specific transactions.   Instead, he claims something else (e.g. "political sabotage") and diverting attention elsewhere.  This does not bode well to overseas investor's perception of what's happening in Malaysia.   Investment Managers are not paid high 6 to 7 digit salaries to act stupid.   US$700 million do not normally get deposited into a private individual bank account.   Either the facts are false, or they are true - there are no "ifs" or "buts".   The fact that he has not yet denied the factual nature of the accusation explicitly when it is extremely simple to do so, will have given rise to a lot of serious concerns to many prudent investors.

The investing community does not behave like a court of law.  Investment Managers are mandated by Investment Policies to be prudent.   Prudence means avoidance of uncertainties and risks when they cannot be quantified.   Investment Managers are not supposed to "gamble" with client's monies.  If even one of the 5 specific transactions (that details the date, $ amounts, the recipient bank account number, the recipient bank account name, the name of the bank, etc.) is proven to be factually true, the principle of prudence dictates that the Manager exercises extra caution.   This means at the very least, that new monies should not be allocated into Malaysia.   Worse, any existing investments may need to be pulled out of Malaysia.

The medium term implications to Malaysia is not looking good, if the allegations by the WSJ is true.  In this scenario, if true, means a very corrupt government leader, combined with widespread and deeply entrenched rot that has permeated to many levels, including what is supposedly an independent institution like Bank Negara, and institutions that are supposed to protect the financial interests of all Malaysians like the Ministry of Finance and all related bodies in the country.  No reasonable Malaysian public will not accept huge amounts of corruption like this.  It becomes even more likely that there will be a new change in government in the next election in 2017/2018, with possibilities of future social unrest.   No sane and prudent investment manager will want to stay invested in Malaysia over the next few years, until there is clarity and certainty over the future political situation.   Above all, the leader must be perceived as clean, reliable, predictable and someone you can trust to conduct business fairly.  A leader, if proven to have received deposits of US$700 million in his private account would not fall under this category.

If the facts are true, how foreign investors will decide and act next should be of no doubt, if they are true to the principle of prudence.

In light of the above charts and events, whilst 6-9 months late, I would still suggest a gradual diversification of risks in light of what could potentially happen over the next 2-3 years.  Over the mid term, the principle of prudence suggests that we should not keep all our investments in Malaysia - if possible invest some overseas.   If you have not yet funded your TOS account, you may wish to do so gradually when the Ringgit dips (to most likely a higher low).   If you have been trading the local stocks only, sell them at rallies, and start to trade gradually in the US markets that allows you to also short the market and play both sides fairly.   Unfortunately, the Malaysia market is one of the most unfair markets I have ever seen especially the warrant market where the only seller permitted are the banks that issues these warrants at a profit to them.   On a whole, buyers of these warrants (whether Call or Put warrants) loses monies.  

Until the red line slopes the other way, I would temporarily avoid committing new monies into Malaysia stock market and the Ringgit for the time being ...  I suspect, given the charts, that the "smart monies" have already done so since the end of last year.

Good luck!

Trading Odds & the 200-day Moving Average Slope

Question

Warren Buffett is the world's most successful investor of all time.  He is one of my Trading Mentors.  When he speaks, I always listen (even if I couldn't do what he does).

One of his key teachings is Buy when everyone else is Fearful, and Sell when everyone else is Greedy.  Whilst he applies that very well for himself for the past 6 decades, most people simply cannot do what he does.

For example, the vast majority of ordinary people simply do not have the experience nor the accuracy to define "Fear" and "Greed" in the market place like he does.  Let's consider a more specific example.

Question:  Would Buffett define the market as being currently fearful on Crude oil and ERX?

Crude Oil Charts

First, a couple of background charts on Crude Oil Futures.  

Starting first with the 20 year Monthly chart on the RHS.  Note in Q1/2015, Crude Oil successfully bounced off the very long term Uptrend Support Line that goes back before year 2000.   This is not just any Support Line, but probably the "mother" of all Support Lines, as this Support Line is over 15 years.  The question is - Has Crude Oil put a multi-year bottom?

I also show a multi-year DownTrend Line drawn from the 2008 peak to the most recent peak.  It cuts through a few peaks and valleys along the way, suggesting a very significant resistance.  This is also not a weak Resistance line, as it stretched back since 2008 (7 years), although not as strong as the first Support Trend line.

The question is - if you are Buffett, is this the time to buy Crude Oil stocks, when "Fear" appears to be on a multi-year high and Prices near all time "Low"?

ERX Profile and Charts

Here is the same type of chart but for ERX.  If you are not sure what is ERX, click here for the profile.  Basically, ERX is a 3X leverage ETF off XLE, and XLE is the ETF that generally corresponds with the Energy Select Sector.   ERX is a relatively new ETF, only started since 2008.

If you are a "Dip Buyer", the price appears to sit on a very long uptrend line since 2009 (see RHS chart below), and on a Daily basis, appears to be sitting on strong support for the 5th time (see LHS chart below).   Both appears to be a valid reason to "pick bottom".   Momentum indicators are also Oversold, whether RSI or Slow Stochastics.   Yesterday Volume is high, suggesting capitulation.  Implied Volatility spikes up, suggesting fear.

So, if you are Buffett, would you buy as price is near all time low, and fear seems to be spiking up?

Successful Trading is about putting the Odds on your side consistently over the Long term
Before you go on the long side, consider if you have the odds on your side to win for your time-frame.

Respect the 200-day Moving Average Slope
The biggest problem I see with the ERX long trade and going long with Crude Oil today is the slope of the 200-day Moving Average, notwithstanding Buffett.   It is still sloping down.   As a working trading rule, when the slope is down, and your trading time-frame is 2 weeks to 2 months, my belief is that the odds are against you when you trade against the slope.  

Odds are just odds.  It does not mean that if you make the trade now, you will lose.  Odds only applies when you have made 100 trades, not 1 trade.  Anything can happen with 1 trade.  It is highly possible that buying at $48.35 will win.   It is highly possible also that buying at $48.35 could later see $48 support broken, followed by $47 support broken, followed by $44 support broken, followed by new lows.

What does this mean?
To me, the ERX chart means this:
1. Safer to pass the long trade, as the 200-day MA is sloping down and a time-frame of 2 weeks to 2 months puts one at the mercy of the longer term trend.
2. If you must play speculatively against the broader trend, the position size MUST be small, not larger than normal.  (This however is NOT smart trading).
3. The smarter, lower risk trade is to wait for a pullback up to the 200-day MA (or another major resistance), and then take the short trade as long as resistance holds and price starts to drop from that resistance.

So, Buffett doesn't matter?
If your trading time-frame is 2 weeks to 2 months, then, Buffett's buy and hold investing methodology doesn't matter to you.  

This is because, one of Buffett's risk control is the ability to hold a fundamentally great business, even if price drops 50% from $48, hold for several months and years because his "holding power" enables him to be right over the long term.  He is perfectly happy if the stock market closes over the next 5 years, which makes him super-exceptional.  

So, if you buy and then bail out when price drops 10%, 20% or more, you are not following Buffett, and this makes a critical difference because price will prove him right over the long term, but you have just made a loss over the short term.  

In addition, Buffett rejects leveraged ETF like ERX.  In addition, Buffett also reject owning a broad-based ETF like XLE or ERX because it comprised of good and bad companies. 

So, it's about Trading a Style that Uniquely Best Fit You?
Yes, because you are the Trader and it's your own account.  A solid system that "fits you" will increase your equity over the long term.   A better system on paper that "doesn't fit you" will more likely cause your equity to reduce over the long term.  Blindly following Buffett without assessing how it fits into your own specific and unique trading system will cause you more damage over the long term.

In short:

- When the 200-day MA is sloping down, don't go long.   You can do nothing, or consider Selling the Rally.  When you pass a trade and not make a profit, that is OK.

What if die die must still go long?

- When the 200-day MA is sloping down, and you are still extremely tempted to go long and cannot resist it, then, if it's truly life or death for you (it means something is probably wrong with your psychology), you must tilt the odds to offset the declining 200-day MA:

1. Never bet more than half the normal size to minimize damage.  

2. Wait for the "best" setup - require that the price action on the downside is "extended" and "extreme".   ERX is an ETF of many good companies, odds improves that if it moves too far down, some kind of a "pullback" becomes more likely.   So, the further away it pulls from a mid term MA, the better.

3. Wait for the "turning point" - Require that the momentum indicators are Oversold / very oversold, i.e. at an Extreme.   This is similar to point 2.

4. Give yourself "buffer" by selling a far OTM Bull Put Spread so that even if price falls, you can still come out a winner.   However, be prepared to cut loss / make adjustments.

5. Make the trade a shorter-time-frame, because the longer the time-frame, the more likely the 200-day MA downslope will exert itself.

6. Look for smaller wins fast, because markets make it more unlikely to get big wins from the long side in a downtrend.

7. Time it perfectly - anticipate and require that ERX has successfully bounced off a very, very strong Support that is tested for the first time, not the 5th time.  Look for reversals at shorter time-frames like Hourly or 15 minute charts.

8. Cut loss fast when you are wrong.   Keep your losses small at all times.

9. All 8 points must exist.  If one is missing, abandon the long trade.

In short, when you trade against the trend, expect to work extremely hard, always demand perfection from yourself, always be very precise and very accurate, always be very nimble, aim to win small, accept higher likelihood of making mistakes and lose, and expect a higher risk of making mistakes and losing bigger too.

But ask yourself this basic question first?   Why must "die die" go long?  Why not look for 1 foot hurdle to walk over easily, instead of looking for 6 feet hurdles to jump over?

Isn't it much easier to pass the ERX long trade and take the other much easier trades?  Or wait until the 200-day MA slope starts to flatten out and rise before going long?

Contrast the following when you trade with the trend - no need to be exactly precise, more relaxed trading, small mistakes which still generates profits, lower likelihood of making large mistakes / losing.  Why not trade with the broader trend?

Conclusion
Over the long term, if your trading timeframe is around 2 week to 2 months, you can't go wrong trading in line with the slope of the 200-day Moving Average consistently. 

It means you will never pick bottom.  It means you will never score the unlikely big win from bottom to peak.  It means a "boring" way of trading, and it is not exciting at all.

But odds are, your equity will grow consistently over the long term.

Buy or Sell S&P500?

Yesterday, S&P500 punctured through the 150-day MA, and touched the 200-day MA lines.   Is this a Buy or Sell signal?

How has the S&P500 performed in the past, when it has touched the 150-day and 200-day MA lines?

This chart is just the past year charts, but I encourage you to do your own study over a much longer period.

On the Main box, I showed 3 things:
1. The 50, 100, 150, 200-day MA.
2. The Linear Regression Channel.
3. The Fibonacci Expansion levels.

General Price commentaries
After the big dip in October 2014, S&P500 index continues to edge higher in December, and continues to make higher highs in Feb and May although the increase is getting smaller.  Since the start of this year, S&P500 seems to be trading in a sideways range.  Just a cursory glance shows that the Bull needs to rest, before making its next move.

The 50, 100, 150, 200-day Moving Averages are getting closer and closer to one another over time (compare today's gaps vs a year ago), suggesting sideways ranges over the past few months.  If this pattern continues, soon, prices will no longer respect the Moving Averages ...

Linear Regression Channel (LRC)
This is one of my favourite ad hoc tool.  The idea is to filter out noises, and just highlight movements outside this channel.  As you can see from above, whenever the price moves near the borders/outside the Channel, it seems to give a good contrarian signal for the trader to act.  It doesn't occurs often, in fact it occurs quite rarely, improving the strength of the signal.

The problem with the LRC is that it doesn't tell you how far the fall can be, when it exceeds the bottom of the channel.  For example, in October 2014, it fell outside this channel for 1-2 weeks, before getting back into the rising channel.   The rising channel validates the longer term Bull trend, together with the slope of the 200-day Moving Average which is also rising.

However, it can be seen that whenever prices fall below the LRC, this would have been a very profitable Buy Signal.  If you had bought every time prices falls below the LRC, and held until prices went back into the Channel, you would appear to have a 100% win rate so far, as long as the Market remains in a Bull Market mode.   Of course, how long the Trader suffers "pain" is uncertain - that is decided by the Market.

Other Indicators
MACD is gradually narrowing over time, suggesting a sideways action in the past - this is actually a potentially dangerous signal if continues over time, as it suggests that there is a potential for a breakout, whether up or down.  We don't know, but yesterday price action suggests serious downside move.

RSI(10) is nearly 30, suggesting an oversold condition.

Slow Stochastics is not yet oversold.

Implied Volatility spiked up, suggesting serious fear.   As Implied Volatility spikes don't last forever, this is also an indication that we could be near the climax of the selling, either this week or at most 2 weeks from now (unless markets crashes which is extremely unlikely scenario).

Support & Resistance
Unfortunately, the Bears will need to do a hell of a lot of work to invalidate this Bull Market.   For me, even if SPX invalidates the December 2014 low, as long as it is still above the October 2014 low, this is still very likely to be a Bull Market.  

Notice that the October 2014 Support sits on the 127.2% Fibonacci Expansion, which itself is an important line.   This line is drawn from the 2007 high down to 2009 low, which marks a very important period in the S&P500 last 2 decade history.

More importantly, the 161.8% Fibonacci Expansion sits at 2138, 4 points higher than the High of 2134 so far.   Normally, first attempts to break a strong resistance like 2138 should fail (meaning it could break it, but eventually, it will fall back below 2138).   This observation can give to trade ideas later on the short side.

For this Bull to be declared Dead, I would need to see SPX violates 1823, or the 200-day MA slope downwards, whichever happens first.   As SPX is 2057, it is still 230+ points or more than 11% away, before the Bull Market would be considered Half-Dead / Dead ...

Until the Bull is Truly Dead, we continue to Buy the Dip
The above is just a sample of possible view to analyse the S&P500.
In fact, you could come to similar conclusions using many other Technical Analysis tools.
The specific tool you use doesn't really matter, as long as you know how to use it well under 10 to 20 years of varying market conditions.


How to Capitalize on this?

1. Look to buy outside the Channel, and sell when it goes back inside the Channel.
Where exactly to buy isn't too critical, as long as it is below the Channel.  The 200-day MA is as good as any.  In general, if the Bull is still intact, lower is better of course.
Where exactly to sell isn't too critical, as long as it is inside the rising Channel.   The 50-day MA is as good a target as any, or the latest Pivot Highs downtrend line resistance.  Of course, we prefer as high as possible, but markets are not always that accommodative.
Of course, we are not looking for extremely small profit, but as much profit as possible without compromising the very high (100%) win rate.

2. The key is holding power, but with Limited Risk, not unlimited Risk
As we don't know when it will go back into the Rising Channel, we need "holding power".

Unfortunately, the problem with owning ETFs is that it presents unlimited Risk.   Markets can do anything, and what we don't want to see if owning a lot of ETF only to see SPX breaks below 1823.   Then, the pain is huge, as this can be up to 12% fall.   If one is 100% invested in SPY, this is at least 12% loss in capital, with no end of the pain in sight.   More pain is possible if the Bull is Dead and the market starts to become a Bear.

Worse of course if you invested in UPRO with 3X leverage.  Instead of 12% loss, that would be 36% loss.  With instruments like this you will need to apply Stop Loss, but this reduces the win rate from 100% down to something significantly lower - it also open yourself to risk of being stopped out unnecessarily.

3. Consider buying a simple Call Option with limited Risk to avoid getting stopped out unnecessarily.
I don't normally trade with a simple Call Option, but this is one situation where simplicity is not actually that bad, given the extreme move outside the Channel.

One critical benefit of owning a simple call option which you can't get if you own ETF, CFD, Futures is predefined Risk.   The most you can ever lose is the entire Option Premiums.  Even if the Market falls by another 10%, 20%, etc.   The trade-off of course is Theta decay - the stock needs to make a move far enough to offset Theta decay before you see the gain.   Given the extreme move (falling outside the channel, and the short term period expected to recover), this is not expected to be a problem.

This of course presumes that you have selected a "safer" Option Strike and Expiry date.  Something like 2-3 months to expiry, and a little bit "out-the-money" (OTM) represents a good compromise between higher % reward and cheaper premium (lower risk).

4. Trade consistently, risking the same % of capital each time, never exceeding 3%-5% capital.
The reason is because Market can do Anything.  The last thing we want to do is to bet the entire farm, only to find Market has turned to become a Bear.

The goal is to win consistently, so that over the long run, we will have winners.

When we have a system with a very high win rate (here, it is still 100% in a Bull Market), we don't need to risk the farm.   Even if the RRR = 1 or 0.5 times, the expectancy should still be very positive, due to the extremely high win rate.   However, what could cause the expectancy to become negative is to be stopped out unnecessarily.

Risks

This is not an endeavour to be applied one time only.  The goal is to reduce risk by taking all eligible signals over time.  The risk is reduced substantially when the number of eligible trades increases over time.

And of course, Markets can do Anything.  It could well be that if you have not bought the Dip before, then, your very next time to do so saw the Market turns from a Bull to a Bear - if so, accept the loss and move on.

Conclusion

The above is not meant to be conclusive, but only to illustrate a system that provides signals rarely, but so far, has a 100% win rate in a Bull market (until the Bull turns into a Bear).

For me, until the Bull conclusively turns into a Bear, every dip, as long as the 200-day Moving Average continues to slope upwards, remains a Buy the Dip near / below the bottom of that ever changing Linear Regression Channel.