How I Trade

I've mentioned I have several different systems I trade. I also mentioned The Trading Digest as helping me not only with those systems, but also in allocating funds across to them. Yes, I do mention their site a lot. You should visit it.

I have six systems I currently trade. By system, I don't necessarily mean entirely mechanical, but some are. I'll list them here in order of capital allocation:

Option Spreads
Dip Buyer
Trend Following
Another Dip Buyer
Discretionary Options
Intraday Futures system

Currently, I'll allocate about 40% of my capital to the Option Spreads. I usually don't tie up anywhere close to this during a given month, so I'll also use that for any discretionary trades. 50% gets spread across the dip buyers and trend following. That leaves 10% for futures.

The option spread strategy is not mechanical. I don't think I can make it that way. Since the volume of trades is relatively low, I don't think I will spend a lot of energy trying to mechanize it. I primarily trade the RUT and occasionally the IWM if I need a little more granularity in my adjustments.

The Dip Buyers and Trend Following are entirely mechanical. I'm just an order taker for those. I will adjust my allocation to each as I see fit depending on the market conditions.

The Discresionary system is just that, discretionary. This is where I take the occasional speculative bet. I'll usually use options for this and it's usually a straight call or put or a vertical spread. Nothing more fancy than that.

Lastly, I have my Futures system. This one is not entirely mechanical, but I am striving to make it so. It's a little trickier to code because there are more variables (like different TICK readings, Advancing / Declining volume, sector ETFs, etc.). I only trade futures intraday because I don't want to comb through a zillion stocks and I can use a relatively small amount of capital. The capital I use is generally what's left over from the other systems. If I'm loaded up on my other systems, I'm not trading any futures. However, if things are relatively slow on the others, I'll add that capital to my futures capital and maybe trade a little bigger.

So, that's how I trade in a nutshell. The reason I trade multiple systems is because each has it's inherent strengths and weaknesses. The dip buyers do well in higher volatility markets regardless of trend, but not as well in strongly trending markets. The trend following model obviously does well when things are trending. They kind of complement each other.

I know this wasn't the most coherent ramble. I'll try to detail these a little more in future posts.

Alan Greenspan and Jon Stewart

Alrighty Then

So the Fed opted to pull out the big guns and lower the funds rate by 50 basis points. I must say, I was not expecting this price action on Tuesday. All morning the tone was decidedly bullish and after the announcement the S&P moved about 30 points in a little less than 5 seconds (ok, maybe it wasn't quite that fast, but it was fast). By the time my data feed caught up, the move was done. There were a couple of decent entry points after that, but I opted to stay out.

My systems did surprisingly well. I was a little nervous Tuesday morning because I was very long. I don't really like having a lot of positions open going into a big market moving announcement. But, if there is one thing I've learned the past couple of years it's "trade the stinkin' system". It doesn't matter what I think will happen - if the system has me long, be long. Obviously, that worked great this time. Next time, maybe it won't, but as long as I'm within the drawdown parameters of the system I'm trading, then just trade the stinkin' system.

My options positions, however, did come under a little pressure the last couple of days. I had to add some vertical put spreads to bring my deltas in line. These are October positions though, so there's still quite a bit of time and anything can happen.

Short What?

I've had some questions on just what the title of this blog means. I begin by saying that it wasn't my first choice and I may end up changing it in the near future. I originally wanted to name it "Delta Neutral" or something like that, but I couldn't find a suitable combination that wasn't already taken. Delta neutral describes my main options strategy fairly well. I sell an Iron Condor and make adjustments to it to keep the delta's relatively neutral.

My next choice was "Long Theta", which also describes this strategy. The whole idea in selling options is to collect the time decay or theta until close to expiration. However, my wife thought this just didn't sound right and it may be mistaken for a very different type of blog. I decided I'm way to close to this stuff since that didn't even register with me until she mentioned it.

So the third choice was Short Gamma, which didn't sound quite as bad. It doesn't exactly describe what I'm doing, but it's close enough. Gamma is the rate of change or acceleration of delta. Generally speaking it will be negative (or short) for an iron condor if that condor is also relatively delta neutral.

While this represents a large chunk of my portfolio, it's still only a portion of the overall. Hence my thought that maybe this isn't the best name either. I use other options strategies occasionally, but most of the rest of my strategies are straight equites or futures.

So, that was a long winded way to say I may be experimenting with the blog name. All two of my readers may be affected by this. I'll also be looking at different templates to jazz things up a bit. I kind of like the minimalist look, but it's a little drab. Once we get through tomorrow, I'll outline how I trade this stuff.

Rate Cut?

So obviously, the big elephant in the room this week is the Fed announcement on Tuesday. This also falls on triple witching week. Options expiration in general tends to be a bit bullish, but this week, who knows?

A rate cut seems to be a foregone conclusion. I think I read somewhere that the fed futures were pricing in a 120% probability (no, I don't know how you get a larger than 100% probability). So if the cut doesn't happen, do we go into a tailspin? Or does that somehow send the message that the economy is doing better than we've been led to believe? (hard to say that one with a straight face)

More importantly, how does any of this affect your trading this week? I have several systems that I trade as one big (well, big in a relative sense) portfolio. I plan on doing nothing different this week than I would any other week. I may try to trade the announcement intraday with emini futures, but otherwise it's just business as usual. All of the systems I trade have been forward tested and most have been thoroughly backtested. I may experience a little bit of a draw down because of that, but that's just trading.

Sometime in the near future I'll go over how my systems are structured and in general how I trade. Suffice it to say that Dave and John over at The Trading Digest have had a huge impact on how everything is structured. If you haven't already, I highly encourage you to head over there and check it out.

Happy Trading.

Jon

Welcome

Welcome to my blog. I hope you will be able to learn something while you are here. I do not claim to have the holy grail of trading and my trades are frequently wrong. However, I do think I have learned some things in the past few years. Hopefully, my meager communications skills will allow me to pass some of those along to you. I also hope to gain some knowledge from the readers.