Friday, May 1, 2009
05/01 RUT 50-Day Condor
My plan for this trade is to leave it alone. If we hit -1.5x the cashflow then I'll close it, otherwise just ride the wave. Let's see if this time the RUT behaves a bit better.
05/01 EWZ Double Diagonal
EWZ Pushed even higher Today, hit my second adjustment. Now the Risk profile looks really lousy.. It wasn't that bad when I evaluated it Yesterday. Need to discuss this with Dan.
It takes a lot of patience to work on this craft.. I'll get there.
It takes a lot of patience to work on this craft.. I'll get there.
05/01 OIH 30-Day Condor
OIH pushed back up Today. A 1 st. deviation move erased Yesterday's gains. This requires a lot of patience.. Let's see how it goes.
05/01 RUT 52-Day Condor - post trade analysis
My RUT 52-Day condor was stopped Out Yesterday. I was puzzled to see it go out with price still being within the 1 st. deviation in the volatility cone. Let me clarify why:
1) I have backtested the 52-day condor since 2002 using a simple volatility Cone and TOS think back. My results showed me that these trades would work most of the time, and for the times of failure, price would have to be way beyond the 1 st. deviation zone on the volatility cone.
2) When putting the strategy to the real test, I got kicked out as soon as prices went a little bit outside of the 1 st. deviation zone. That is quite different from what I was expecting.
So I went back and evaluated what might have caused such discrepancy between my backtested results and these actual results. Here are some reasons:
a) Execution slippage: When you backtest you take the end-of-day quote and assume you'd get a fill for that price. In reality, you rarely get the MID price for execution. For my position, I got .15c execution slippage, that is 10% right off the top!
b) Commissions: Cost of doing business, here goes another bunch of money from your position. In RUT's case, I paid $8.00 in commissions, the trade's max profit was $111, so $8 bucks is another 7% less.
c) Strategy Execution: When backtesting I did not account for closing any of the sides when they were 80% profitable. This, in my opinion is another major difference. I closed the PUT side on both my trades, in the RUT's example, to close the PUT spread I paid $12 bucks, including commissions, that's 10% of my max profit..
So, what does it mean moving forward? To make this as close as possible to my backtesting results I have to control costs as much as possible. We're trading to make $111 bucks, if we spend $10 bucks for whatever reason, we're already cutting 10% off our profits..
I can't control commissions, but I can control execution. I'll insist in better execution and will no longer close the opposite side when the profits are there. In the future, I may be able to further reduce the commissions I'm paying now, maybe switching broker, but I won't go there, at least not yet.
Here is a visual that will show you what difference this can make. Bellow are two volatility charts, one is a backtest, the other is for my real RUT trade. Notice How much sooner I got stopped out on the real RUT vs. the backtest.
NOTE: The same comments apply to the MNX 45-Day Condor position.
1) I have backtested the 52-day condor since 2002 using a simple volatility Cone and TOS think back. My results showed me that these trades would work most of the time, and for the times of failure, price would have to be way beyond the 1 st. deviation zone on the volatility cone.
2) When putting the strategy to the real test, I got kicked out as soon as prices went a little bit outside of the 1 st. deviation zone. That is quite different from what I was expecting.
So I went back and evaluated what might have caused such discrepancy between my backtested results and these actual results. Here are some reasons:
a) Execution slippage: When you backtest you take the end-of-day quote and assume you'd get a fill for that price. In reality, you rarely get the MID price for execution. For my position, I got .15c execution slippage, that is 10% right off the top!
b) Commissions: Cost of doing business, here goes another bunch of money from your position. In RUT's case, I paid $8.00 in commissions, the trade's max profit was $111, so $8 bucks is another 7% less.
c) Strategy Execution: When backtesting I did not account for closing any of the sides when they were 80% profitable. This, in my opinion is another major difference. I closed the PUT side on both my trades, in the RUT's example, to close the PUT spread I paid $12 bucks, including commissions, that's 10% of my max profit..
So, what does it mean moving forward? To make this as close as possible to my backtesting results I have to control costs as much as possible. We're trading to make $111 bucks, if we spend $10 bucks for whatever reason, we're already cutting 10% off our profits..
I can't control commissions, but I can control execution. I'll insist in better execution and will no longer close the opposite side when the profits are there. In the future, I may be able to further reduce the commissions I'm paying now, maybe switching broker, but I won't go there, at least not yet.
Here is a visual that will show you what difference this can make. Bellow are two volatility charts, one is a backtest, the other is for my real RUT trade. Notice How much sooner I got stopped out on the real RUT vs. the backtest.
NOTE: The same comments apply to the MNX 45-Day Condor position.
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