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Yowster

2015 Year End Performance by Trade Type

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Thanks Yowster, very good analysis as usual.

 

My comments:

 

Overall, I'm very pleased with the results. We are getting more selective, and it shows up.

 

Straddles produced 4.26%, which some will call "mediocre gains", but we need to put things in perspective. First, average holding period of those trades is usually around 6 days, so 4.25% average return is 258% annualized return. Doesn't look so mediocre all the sudden. Second, it hedges our theta positive trades very nicely. To me, this is very decent result. Could be better, but I will take it. The performance was also impacted by big QIHU loss, which was completely unnecessary.

 

SPY/TLT combo is a new strategy introduced this year. The results could probably be slightly improved with better management, but on a year when both SPY and TLT were down, this is an acceptable result, especially considering that TLT volatility was much higher than usual, which is not good for this trade.

 

VIX trades: I agree regarding the broker, but most of those trades can be done with other brokers with slight variations. For example, the put calendar could be replaced with put credit spread. The only trade that was problematic executing with other brokers is the VIX call calendar.

 

The theta positive index trades is where I see room for improvement. The SPX calendar and fly big losses impacted the overall performance negatively.

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Kim,

 

Sorry about using the term "mediocre" when referring to the straddle/strangle gains, "modest" would have been a more appropriate term to use.  The year to year increase in avg gain is also very good as you've gotten more selective.  You are certainly correct when calculating the annualized gain, although annualized gains of some of the other SO strategies are also high.  From my personal trading perspective, my biggest issue with the straddles is the amount of trade management involved with the rolls relative to the potential gain and not being available at all times during the trading day to react (darn "real job").  With my limited trading time, I only play a few of the straddles and spend more on strategies with higher potential gains and look to other vehicles for hedges to our theta positive trades.  When I'm finally able to retire and have more trading time, I may very well place more of these trades.

 

I just noticed that the QIHU trade you refer to is not yet in the "performance" tab, looks like the trades closed in December are not there yet.  I'll update the main post when those results show up in the performance tab but the straddle numbers will likely go down some because of QIHU and the index trades will go up a bit based on the profitable SPX butterfly closed in December.

Edited by Yowster

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Great Analysis. You are spot on.

My performance matches the results. I dont trade SPX strategies. I have traded only calendars and straddles and lately vix calendars as I opened IB account only for that purpose.

Of all the strategies, for sure VIX call calendars have the best returns/ lowest days in market and consistency.

Among straddles or calendars, my results are mixed. There have been periods of very high returns on straddles and periods of those consistent losses.

Calendars have been winners , but stocks did move causing gains to disappear in some cases.

 

There is place for both strategies and our choice based on IV  is the right thing to do. The results cannot be expected to be 100% , so even 80% winning is good enough to gain overall.

I am more biased to calendars as it has more winning % than straddles and gains are high enough to warrant a chance trade.

 

But straddle is a tough trade. Sometimes IV collapses like FDX, where gains just disappear in front of your eyes and helplessly we have to watch as we dont stop it out.

Straddle is extremely sensitive to IV and entry has to be more accurate than a calendar as well as both strike price / IV / timing has to considered. Also the problem of roll or not roll is another decision to constantly make.

With calendar the entry can be less accurate. Of course this is true with high priced stocks where calendar has wide range to prices to move. 

For low priced stocks, the range is very low and every tick is 10% of the trade or more.

 

Barring qihu trade, I had a tremendous year and I am getting better with entries and weighing risk/rewards of entries. 

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Kim,

 

Sorry about using the term "mediocre" when referring to the straddle/strangle gains, "modest" would have been a more appropriate term to use.  The year to year increase in avg gain is also very good as you've gotten more selective.  You are certainly correct when calculating the annualized gain, although annualized gains of some of the other SO strategies are also high.  From my personal trading perspective, my biggest issue with the straddles is the amount of trade management involved with the rolls relative to the potential gain and not being available at all times during the trading day to react (darn "real job").  With my limited trading time, I only play a few of the straddles and spend more on strategies with higher potential gains and look to other vehicles for hedges to our theta positive trades.  When I'm finally able to retire and have more trading time, I may very well place more of these trades.

 

I just noticed that the QIHU trade you refer to is not yet in the "performance" tab, looks like the trades closed in December are not there yet.  I'll update the main post when those results show up in the performance tab but the straddle numbers will likely go down some because of QIHU and the index trades will go up a bit based on the profitable SPX butterfly closed in December.

I see your point regarding trade management. But there are ways to automate the rolling by setting GTC orders at our usual credits. And even if you miss some of the rolls, it's not ctitical and sometimes it can work in your favor. But considering short holding time and low risk, I think it is still worth to do those trades.

 

Also, remember that they can be very profitable during IV spikes. We missed the August spike, and things would look much better if we held 2-3 trades in August and got 25-30% gains on each.

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Note that I updated the main post in this thread today to reflect the December trades that Kim just added to the Performance Tab, the significant changes were:

  • Straddle/Strangle numbers went down, largely a result of the big QIHU loss (I did note the avg gain for the straddles/strangles if QIHU was excluded).
  • Index trade numbers improved as a result of successful SPX butterflies and SPY/TLT combo closed in December.

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Since beginning to trade the Steady Options (SO) Alerts there have been 54 trades in the model SO portfolio for a net equity gain of 44.96%.  My parallel portfolio had net gain of 26.32% (a discrepancy of -18.44%.

 

25% of the discrepancy is explained by 8 non-SO trades I took with 5 winners and 3 losers but the 3 losers wiped out the gains on the winners.

The remaining 75% of my underperformance is explained by the following:   I managed to  gain entry and participate in all but 1 of the LOSING SO trades.  BUT  I was not able to enter 39% of the WINNING SO trades because the entry prices "ran away" from me after the SO alert.   All of the failed entries were on earnings trades of individual stocks.

 

Statistically, if I got a good entry price immediately this signaled that the trade was likely to be a loser.  If I was unable to get a good entry price (within 1% of official alert entry) it was likely to be a winning trade. 

 

Once in a trade I outperformed the SO trades by having better exits.  I had slightly smaller average losses on the losing trades and slightly higher gains on the winning trades.    On the pairs trades I did consistently better on every trade. 

 

The challenge, therefore, is to not have to wait for the SO alerts, particularly in stocks where the targeted strike prices have low liquidity.  Be quick on entry for earnings trades and patient to enter on non-earnings trades.

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Is there any separate forum where we can discuss monthly performance. Looks like 4 butterflies were able to balance loss on VIX calender.  we need one good trade so we can be in profit for this month. Hope AMZN helps on this.

 

  INTC 11% $110   4 butterlies 110% $1,100   Combo Loss -6.25% -$62.50   NFLX Loss -44% -$440         Unrealized Vix Strangle -12% -$120 Unrealized Vix Calender -100% -$1,000   1.8% commison on 10 trades -18% -$180       -$593

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Yes, the only way to accurately measure a trade is when it closes. How many times have we had an negative trade eventually go positive? Also, if we happen to have a losing month or two, then we are traders in the market. Anybody who does not expect an occasional losing month or two is living in a fantasy world.

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Here is the performance so far.
INTC 11% $110
4 butterlies 110% $1,100
Combo Loss -6.25% -$62.50
NFLX Loss -44% -$440
 
Unrealized Vix Strangle -12% -$120
Unrealized Vix Calender -100% -$1,000
1.8% commison on 10 trades -18% -$180
 
 
Total Loss = -$593

 

Steadyabc,
 
As you mention, I'm not sure this is the proper thread for performance discussion, but here goes:
 
It's discouraging - I want to offer some empathy because I've had a bad losing month too. But that doesn't mean Kim's system doesn't work. I've missed a few of the SPX butterflies, and have experienced BAD losses on the trades I have gotten into. January has been a bad month for me. I admit that I myself have not been satisfied yet with my own consistency using Kim's system, but that's due to two reasons:
1.) I haven't yet matched his performance - I've come to believe simply following his alerts, you will NEVER match his performance - you must learn to anticipate and make this system your own (and the folks in this community are more than happy to help you do that)
2.) Losing streaks are expected (which is what I'll discuss for now)

Others have noted that the positions you listed aren't even closed yet - but for the sake of discussion, let's say they are.

 

Let's assume you're matching Kim's performance, and talk about losing streaks:
Even in the BEST systems, statistically, losing streaks are bound to happen. In fact, they can even be mathematically quantified by the following equation:
LS=ln(TS)/-ln(1-PW/100)
Where LS is the worst potential losing streak, TS is the trade sample, and PW is the probability of winning (ln is the natural log). 
 
Since inception, SO has experienced 831 trades, with a win ratio of 62.1%. This STATISTICALLY allows a worst-case losing streak of about 7. That means, that on ocassion, this strategy will experience 7 losers in a row. That's IF you match how well Kim does (and that's a big IF!). That's also assuming Gaussian distribution (which isn't the best assumption - meaning statistical anomalies are more likely than given in normality).
 
But the system works. The VAMI speaks for itself. It just needs time and consistency. 
 
Drawdowns can be pyschologically devastating though. If you have the time, I cannot recommend this talk highly enough (about 21 minutes in is where he talks about losing streaks):
 
Ask yourself - can you handle 7 losers in a row with a 10% allocation? To be conservative, let's assume each loser loses 50% - that's nearly a 35% draw-down on the account. If you require a lower risk tolerance, you should lower your allocation.

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"1.) I haven't yet matched his performance - I've come to believe simply following his alerts, you will NEVER match his performance - you must learn to anticipate and make this system your own (and the folks in this community are more than happy to help you do that)

2.) Losing streaks are expected (which is what I'll discuss for now)"
 
Absolutely agree on both. But to make this system your own, you need more than few weeks or even months. Those articles might help:
 

Why Retail Investors Lose Money In The Stock Market
Are You Ready For The Learning Curve?
Can you double your account every six months?
How to Calculate ROI in Options Trading
Performance Reporting: The Myths and The Reality
Are You EMOTIONALLY Ready To Lose?

 
"This STATISTICALLY allows a worst-case losing streak of about 7."
 
Agree. 
 
"To be conservative, let's assume each loser loses 50% - that's nearly a 35% draw-down on the account."
 
This is where I would have to disagree.
While we did have one 7 losers streak since inception - https://steadyoptions.com/performance_2013 (January 2013), it was nowhere near 35% drawdown. Our average loser is around 13%, so 7 13% losers with 10% allocation gives you 9% drawdown. We had few 5 losing streaks, and I believe the largest drawdown since inception was around 20%. For a system that produces triple digit gains year after year, that's completely acceptable. Does it mean that 7 50% losers is impossible? No, it is possible, just extremely unlikely. But if you are still not ready, then yes, reduce the allocation.
 
To demonstrate my point, I will use the Steady Condors strategy. The reason is that this is a simple and totally reproducible system (so there is no question of missing some good trades), and we also report performance on the whole account including commission.
 
SC produced 24% average annual return since 2008. But it had pretty bad year in 2014, producing almost 19% drawdown. Guess what? In 2015, it produced 47% return (best year ever). First 2 months of 2016 have been tough so far. Imagine someone who joined in 2014, lost 15-20% (depending on timing), cancelled just to see the system producing 47% return in 2015, then rejoined just to be down another 10%+ in 2016.. Not a pretty experience. But if you believe in a system in general and it suits your trading style, you should stick through good times and bad.

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Appreciate your thoughts Kim!

I think I use the 50% loss for losers mentally, not as being representative of typical SO losses, but rather what's in the realm of possibility. I might be erring on the side of caution (maybe even ridiculously so), but it helps me set my risk tolerance. I figure commissions plus my typical rookie mistakes could of course play a role as well.

I also completely agree with the SC example... any trading system needs enough time to turn a profit and work as expected. 

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My only objective is to get valuable suggestions to fine tune from your vast experience and other senior traders with "SO" experience and results will be in place. I have been trading options for a while with other news letters and on my own with different style and strategies. I like "SO" trades as they nicely blend for all market situations. I am trading with the amount that's way below my risk tolerance. When we hedge vix ($1000)  trade with butterfly trade, like the last one the contract amount was $575, in that case is it better to open two contracts ($1150) or just one contract??

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      Iron condors for example will be hard to trade with less than $5,000.
      Also, you need to keep in mind that commissions and fees are going to have a much larger impact on a small account.
      Ideally, you want to have around $5,000 to $10,000 at a minimum to start trading options.Call Course
      HOW TO TRADE OPTIONS FULL-TIME
      To become a full-time options trading requires a big commitment both financially and mentally. As the old saying goes, “It’s the hardest way there is to make easy money”.
      Trading is hard, there will be good times and bad times. Will you be able to handle the emotional upheaval the bad times can cause?
      The first step to figuring out if you can go full-time, is to figure out how much you need to live off.
      If you want to make it as a trader, you need to be prepared to live pretty frugally. We’ve all seen the images of hot shot traders driving Ferraris, but that’s not the reality for 99% of traders out there. Most full-time traders I know live very frugally.
      First things first, you should audit your spending behaviour and see if there is anywhere you can cut back without sacrificing your lifestyle.
      The next step is to build a track record over a few years and figure out what sort of return you can expect on a consistent basis. It would be good to have this track record through a variety of different market conditions. There are a lot of “bull market geniuses” out there right now, but how will they fare during the next bear market?
      Let’s say you’re pretty confident that you can achieve 15% per year. If you can live off $50,000, then you need a capital balance of $333,333.33. If your results indicate you can only achieve a 10% return then you need $500,000 but if you can achieve a 20% return then you only need $250,000.
      You can see there is a massive variation in the amount of capital needed depending on your returns.
      The best bet is to build that track record and figure out what sort of return YOU can achieve. Every trader is different after all.
      Also note, that I haven’t met many traders consistently earning over 20% per year (despite what all those internet ads tell you), and I’ve met A LOT of traders in the last 15 years. Your Options Trading
      DEALING WITH LOSING MONTHS
      Losing months are never fun for any trader, but they are a double whammy for full-time traders. Not only has your account balance gone down, you’ve also had to withdraw funds to live off.
      So your account has taken a double hit, and now you need an above average return next month.
      Can you handle that kind of stress?
      Having a minimum account size that you’re aiming for is a great idea, but it might be worth waiting until your balance is a little higher than you think you need in order to safely handle those losing months.
      Some traders will have 12 months’ worth of expenses set aside (outside their trading account) before making the jump to full-time.
      Trading is a tough game, and if you’ve got the added pressure of needing to make a certain return to put food on the table only adds to that stress. Having some emergency funds put aside can help you focus on the business of trading.
      ADDITIONAL EXPENSES
      One thing a lot of people don’t consider is the additional expenses that can be incurred as a trader. Does your current employer cover your health insurance? Do they pay for your smartphone? Do they provide you with a fast computer? A gym membership?
      All these things and more will be your responsibility going forward. If your computer breaks and you don’t know how to fix it, you need to pay a computer guy to fix it for you. Previously your employer would take care of all of this. Same goes for your phone etc.
      Be prepared for some additional expenses when you work for yourself.Implied Volatility Calculator
      CONCLUSION
      Hopefully I haven’t stressed you out too much, but the reality is, you need a significant amount of capital before even thinking about becoming a full-time trader.
      Those of you who have $50,000 and think you can go full-time, I’m sorry but it’s just not going to happen. Unless you’re a single guy who can live the backpacker lifestyle in Thailand.
      But, trading is one of the most rewarding jobs there is. No boss, work from home, travel, the list goes on.
      Stick at it, take it step by step and slowly build your account, and you will get there.


      Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. He launched Options Trading IQ in 2010 to teach people how to trade options and eliminate all the Bullsh*t that’s out there. You can follow Gavin on Twitter.
    • By Kim
      Performance Dissected
      Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower, depending on the broker and number of trades. Please read SteadyOptions 2019 Performance Analysis for full analysis of our 2019 performance. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Please refer to How We Calculate Returns? for more details.
       
      Our strategies
      SteadyOptions uses a mix of non-directional strategies: earnings plays, Straddles, Iron Condors, Calendar Spreads, Butterflies etc. We constantly adding new strategies to our arsenal, based on different market conditions. SO model portfolio is not designed for speculative trades although we might do some in the speculative forum. SO is not a get-rich-quick-without-efforts kind of newsletter. I'm a big fan of the "slow and steady" approach. I aim for many singles instead of few homeruns. My first goal is capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come.
       
      What's New?
      We continue expanding the scope of our trades. We are now trading hedged straddles, short term straddles, ratio spreads and more.
        We launched Steady Momentum and Steady Futures services. 
        We have implemented more improvements to the straddle strategy that reduces risk and enhances returns.
        We started using the CMLviz Trade Machine to find and backtest some of our trades. This is an excellent tool that already produced few nice winners for us.
        What makes SO different?
      We use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night.
       
      Our performance is based on real fills. Each trade alert comes with screenshot of our broker fills. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage.
       
      It is not a coincidence that SteadyOptions is ranked #1 out of 723 Newsletters on Investimonials, a financial product review site. Read all our reviews here. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community.
       
      We place a lot of emphasis on options education. There is a dedicated forum where every trade is discussed before the trade is placed. We discuss different strategies and potential trades. Unlike most other services that just send the trade alerts, our members understand the rationale behind the trades and not just blindly follow the alerts. SO actually helps members to become better traders.
       
      Other services
      In addition to SteadyOptions, we offer the following services:
      Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Anchor Trades produced 38.4% gain in 2019, beating its benchmark by 7.0%.
        Steady Momentum - puts writing on equity indexes and ETF’s. Steady Momentum produced 19.1% gain in 2019, beating our benchmark by 5.5%.
        PureVolatility - Volatility products like VXX and UVXY. PureVolatility produced 28.3% gain in 2019.
        Steady Futures - a systematic trendfollowing strategy utilizing futures options. Steady Futures produced 8.6% gain in the second half of 2019 (launched in July 2019). We offer a 5 products bundle (SteadyOptions, Steady Momentum, Anchor Trades, PureVolatility and Steady Futures) for $745 per quarter or $2,495 per year. This represents up to 50% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. More bundles are available - click here for details.

      Subscribing to all services provides excellent diversification since those services have low correlation, and you also get the ONE software for free for 12 months with the yearly bundle. 

      We also offer Managed Accounts for Anchor Trades and Steady Momentum.
       
      Summary
      2019 was another excellent year for our members. All our services delivered excellent returns.

      SteadyOptions is now 8 years old. We’ve come a long way since we started. We are now recognized as:
      #1 Ranked Newsletter on Investimonials Top 10 Option Trading Blogs by Options Trading IQ Top 40 Options Trading Blogs by Feedspot Top 15 Trading Forums by Feedspot Top 20 Trading Forums by Robust Trader Best Options Trading Blogs by Expertido  Top Traders and People in Finance to Follow on Twitter Top Trading Blogs To Follow by Eztoolset Top Twitter Accounts to Follow by Options Trading IQ I see the community as the best part of our service. I believe we have the best and most engaged options trading community in the world. We now have members from over 50 counties. Our members posted over 125,000 posts in the last 8 years. Those facts show you the tremendous added value of our trading community.
       
      I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services.

      Let me finish with my favorite quote from Michael Covel:
       
      "Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between."
       
      If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee.
       
      Happy Trading from SO team!
       
    • By Jesse
      Keep in Mind, Stocks Rose 1,100-fold During This Period
       
      From Morgan’s article:
       
      The S&P 500 rose 1,100-fold over the last 70 years, including dividends. But look what happened during that period:
       
      May 1946 to May 1947. Stocks decline 28.4%. A surge of soldiers return from World War II, and factories across America return to normal operations after years of building war supplies. This disrupts the economy as the entire world figures out what to do next. Real GDP declines 13% as wartime spending tapers off. A general fear that the economy will fall back into the Great Depression worries economists and investors. June 1948 to June 1949. Stocks decline 20.6%. A world still trying to figure out what a post-war economy looks like causes a second U.S. recession with more demobilization. Inflation surges as the economy adjusts. The Korean conflict heats up. June 1950 to July 1950. Stocks fall 14%.North Korean troops attack points along South Korean border. The U.N Security Council calls the invasion “a breach of peace.” U.S. involvement in the Korean War begins. July 1957 to October 1957. Stocks fall 20.7%. There’s the Suez Canal crisis and Soviet launch of Sputnik, plus the U.S. slips into recession. January 1962 to June 1962. Stocks fall 26.4%. Stocks plunge after a decade of solid economic growth and market boom, the first “bubble” environment since 1929. In a classic 1962 interview, Warren Buffett says, “For some time, stocks have been rising at rather rapid rates, but corporate earnings have not been rising, dividends have not been increasing, and it’s not to be unexpected that a correction of some of those factors on the upside might occur on the downside.” February 1966 to October 1966. Stocks fall 22.2%. The Vietnam War and Great Society social programs push government spending up 45% in five years. Inflation gathers steam. The Federal Reserve responds by tightening interest rates. No recession occurred. November 1968 to May 1970. Stocks fall 36.1%. Inflation really starts to pick up, hitting 6.2% in 1969 up from an average of 1.6% over the previous eight years. Vietnam War escalates. Interest rates surge; 10-year Treasury rates rise from 4.7% to nearly 8%. April 1973 to October 1974. Stocks fall 48%.Inflation breaks double-digits for the first time in three decades. There’s the start of a deep recession; unemployment hits 9%. September 1976 to March 1978. Stocks fall 19.4%. The economy stagnates as high inflation meets dismal earnings growth. Adjusted for inflation, corporate profits haven’t grown for eight years. February 1980 to March 1980. Stocks fall 17.1%. Interest rates approach 20%, the highest in modern history. The economy grinds to a halt; unemployment tops 10%. There’s the Iran hostage crisis. November 1980 to August 1982. Stocks fall 27.1%. Inflation has risen 42% in the previous three years. Consumer confidence plunges, unemployment surges, and we see the largest budget deficits since World War II. Corporate profits are 25% below where they were a decade prior. August 1987 to December 1987. Stocks fall 33.5%. The crash of 87 pushes stocks down 23% in one day. No notable news that day; historians still argue about the cause. A likely contributor was a growing fad of “portfolio insurance” that automatically sold stocks on declines, causing selling to beget more selling — the precursor to the fragility of a technology-driven marketplace. July 1990 to October 1990. Stocks fall 19.9%. The Gulf War causes an oil price spike. Short recession. The unemployment rate jumps to 7.8%. July 1998 to August 1998. Stocks fall 19.3%. Russia defaults on its debt, emerging market currencies collapse, and the world’s largest hedge fund goes bankrupt, nearly taking Wall Street banks down with it. Strangely, this occurs during a period most people remember as one of the most prosperous periods to invest in history. March 2000 to October 2002. Stocks fall 49.1%. The dot-com bubble bursts, and 9/11 sends the world economy into recession. November 2002 to March 2003. Stocks fall 14.7%. The S. economy puts itself back together after its first recession in a decade. The military preps for the Iraq war. Oil prices spike. October 2007 to March 2009. Stocks fall 56.8%. The global housing bubble bursts, sending the world’s largest banks to the brink of collapse. The worst financial crisis since the Great Depression. April 2010 to July 2010. Stocks fall 16%. Europe hits a debt crisis while the U.S. economy weakens. Double-dip recession fears. April 2011 to October 2011. Stocks fall 19.4%. The U.S. government experiences a debt ceiling showdown, U.S. credit is downgraded, oil prices surge. June 2015 to August 2015. Stocks fall 11.9%. China’s economy grinds to a halt; the Fed prepares to raise interest rates. ____________________________________________________________
       
      I like Morgan’s article, it reminds us that economic uncertainty has always been a regular part of the past along with frequent corrections (10%+ declines) and deep bear markets (20%+ declines). His intention is to help us have a long term perspective. Many times throughout the past seven decades, “this has never happened before”.  Yet the US continued to show its strength and resiliency. For some, this is effective. For others, they need something more to help them follow their plan.
       
      Dual Momentum
       
      In the equities portion of our dual momentum model, we rotate among US Large, US Small, and International stocks based on twelve month relative strength momentum[2]. When all three asset classes have negative absolute momentum[3], we switch into bonds. The idea here is to earn the risk premium in stocks with less exposure to the downside volatility and bear market drawdowns that frequently have occurred in the past and will frequently occur in the future. We emphasize less in an effort to promote proper expectations. Empirical data suggests that dual momentum can be used to earn higher returns with less risk than buy and hold, but it’s not a Holy Grail. Holy Grail strategies tend to fall apart in real time because they were over fit to a limited amount of past data with no economic argument to support why they work. Researchers refer to this as data-mining. With dual momentum, we believe having a proven rules-based method in place to exit equities ahead of the majority of major bear market declines can be all that is needed to help investors have the confidence to stick with their strategy for the long term. And the right strategy for every investor is the one they will stick with. This is key.
       
      Since Morgan is using data since 1946, we thought it would be fun to look at showing our dual momentum equities model during this same period (note: international is excluded in this example due to lack of data prior to 1970 although we use it in our actual trading model).
       
      Here are a few things to take notice of on both the chart and in the statistics. On the chart, it’s important to notice that our dual momentum approach did NOT outperform an equal weighted buy and hold portfolio in the first thirty years, but slightly lagged or matched buy and hold for most of the period. Thirty years is the investment time horizon for many investors, not seventy. If only relative strength momentum would have been used during this period, outperformance would have occurred. Absolute momentum, or trend following momentum, will take you out of the market at times when doing nothing would have ended up being the better short term outcome. We call these whipsaws, and they are expected as a short term price to pay for risk management that can allow us to sidestep the majority of painful bear market drawdowns.
       
      Over the long term, relative strength and absolute momentum tend to contribute fairly equally to excess returns. If the future ends up looking more like this specific period of the past, we still would prefer dual momentum’s slight underperformance as a small cost to pay for the psychological comfort of knowing a plan is in place to protect capital against 50% drawdowns. The total outperformance of dual momentum in the last seven decades comes in the more recent four decades where three separate bear markets of 50%+ losses occurred for buy and hold investors. Two of these occurred in the last fifteen years. This is when absolute momentum does its job of taking us out of equities in the early stages of bear markets. Even during the first thirty year period, dual momentum still produced lower volatility and maximum drawdown[4], and a higher Sharpe Ratio. The period of 1946-1972 produced an annualized return of 12.1% for buy and hold and 11.78% for dual momentum, while over the entire duration dual momentum produced both higher returns and less risk.
       
      We make clear to our clients that beating the market isn’t a financial goal, and it would be intellectually dishonest for us to suggest we can guarantee anything about the future. What we can guarantee is that we have vigorously researched a robust investing plan supported by decades of historical data and third party validation. When combined with disciplined execution and realistic expectations, we believe the probabilities are highly in favor of a successful long term investing experience.
      Investigate carefully Choose wisely Follow faithfully Fama/French (2008): Momentum is “the center stage anomaly of recent years…an anomaly that is above suspicion…the premier market anomaly.”
       
      [1] The Credit Suisse Global Investment Return Yearbook shows how both US and World ex-US (in USD) equity risk premiums have far exceeded those of bonds and bills since 1900 forming the portfolio theory basis for focusing on equities in our dual momentum model.
      [2] Relative strength momentum compares total returns of one asset class to another over an applicable lookback period. The asset class that has risen the most is held for the next month.
      [3] Absolute momentum is defined as having a total return less than the risk free rate (such as US T-bills) over the applicable lookback period.
      [4] Maximum drawdown measures total peak to trough loss suffered prior to reaching new equity highs. Maximum drawdown is much more important to most investors than the more frequently mentioned measure of risk known as standard deviation or annualized volatility.
       
      Past performance doesn’t guarantee future results. The concepts of dual momentum were pioneered by the research of Gary Antonacci. We recommend using his best-selling book and blog as an additional resource for studying momentum. This is a hypothetical model intended to show the efficacy of dual momentum, and is not intended to represent specific investment advice. Data is gross of any applicable taxes and transaction costs, and investors should always consult with their tax advisor before investing. All investments carry risk, may lose value, and are not FDIC insured. We provide the hyperlink to Morgan Housel’s article as a convenience and do not endorse nor guarantee the accuracy of any information he has presented.
       
      Feel free to contact us if you’d like to discuss your specific situation further. We welcome every opportunity to discuss how we could add value to your financial life.
       
      Related Articles:
      Buy The Winners: The Power Of Momentum Momentum – The Premier Market Anomaly  
    • By Jesse
      The below chart illustrates the wide range of one-year outcomes. Investors should attempt to truly internalize the emotions they are likely to feel with this type of very normal and expected volatility associated with equity investing. Euphoria when volatility results in above average premiums and despair when volatility results in substantially negative premiums.
       

       
      There has historically been about one third of all years where the equity premium was negative (the equity market underperformed T-bills), and sometimes by substantial amounts where an investor would have experienced significant short-term capital losses taking several years to recover. Even at a 10-year time horizon, the historical frequency of a market portfolio of US stocks outperforming riskless T-bills has not been guaranteed, with approximately 15% of periods resulting in a negative equity premium. 15% of historical 10-year periods would have resulted in a time of reflection where you realized you took risk for an entire decade without receiving a reward relative to leaving your capital in the safety of T-bills, which are a proxy for cash/money market.
       
      Over time an investment in the total US equity market is expected to provide investors with a return that is many multiples of an investment in risk-free T-bills, otherwise investors would not take on the risk. Diversifying globally further increases these odds, but it’s never a guarantee so investors should come to peace with this uncertainty in order to make better informed investment decisions.
       
      Choice #1: Resist the lessons available within the historical data and endlessly pursue the hope of finding someone or something that can remove the risk of the equity market without also at the same time removing the return.
       
      Choice #2: Come to peace with the historical data, knowing the odds of earning the expected equity premium improve as your time horizon increases, and build a financial plan that accounts for the probabilities.
       
      I believe the second choice is the more likely path towards a long-term successful investment experience as the historical evidence against active portfolio management is overwhelming to the point to where it's imprudent to even try. This is a market-based approach where an investor focuses on what they can control, such as minimizing costs & taxes and thinking through proper asset allocation between stocks, bonds, and cash suitable for their situation. At the same time an informed investor knows how volatile the equity premium can be and is less likely to panic sell when it’s negative for a long period of time. Surprise is often the mother of panic, so it’s best to become a student of history so that you’re not surprised when the risk shows up. Harry Truman said "The only thing new in the world is the history you don’t know.”
       
      In an excellent piece available upon request titled “The Happiness Equation”, Brad Steiman of Dimensional Fund Advisors writes “Ancient wisdom teaches acceptance, as resistance often fuels anxiety. Instead of resisting periods of underperformance, which might cause you to abandon a well-designed investment plan, try to lean into the outcome. Embrace it by considering that if positive premiums were absolutely certain, even over periods of 10 years or longer, you shouldn’t expect those premiums to materialize going forward. Why is this? Because in a well-functioning capital market, competition would drive down expected returns to the levels of other low-risk investments, such as short-term T-Bills. Risk and return are related.”
       
      Would acceptance or resistance better describe your current portfolio and emotional state as an investor? If it’s resistance, what are you going to do to get closer to a state of acceptance to increase your odds of a successful investment experience?
       
      Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University.

      Related articles:
      Coming To Peace With Market Volatility: Part II Should You Care About The Sharpe Ratio? Thinking in terms of decades The benefits of diversification The Importance of Time Horizon When Investing How I Invest My Own Money Realistic Expectations: Using History as A Guide Risk Depends On Your Time Horizon
    • By Kim
      2012 and 2013 were in line with our long term profit target of 2-3% per month, but 2014 was a very difficult year for most condor traders. We know many services that actually blew out their clients accounts, but Steady Condors at least was able to limit the losses to reasonable amount, which allowed us to recover from the drawdown within the next 6 months. 2015 was obviously very good, producing 56.5% compounded yearly return. 2014 is the main reason why we are below the long term average. Statistically this not unexpected considering it is only 4 years of data.
       
      But Jesse provided a much better explanation:
       
      This has been on the FAQ page for quite a long time:
       
      How much can I expect to make with your service?
       
      Our objective is to make a living, not a killing. We like the story of the tortoise and the hare. Income trading is NOT an ATM machine, regardless of what other option based services are marketing to you. It’s hard and it takes discipline, experience, and a well thought out written plan on how to manage risk.  We believe markets aren't perfectly efficient, but they are a lot harder to beat over the long term than most people realize.  Our long term goal is to make an average of 15-25% annually on the whole account after trading costs (commissions and slippage). Options inherently provide leverage and substantial risk of loss when not used properly, and iron condors are no exception.  Many people mistakenly confuse the high probability of success (per trade) that iron condors offer with safety.   
       
       
      Return data is useless without also analyzing risk. I expect SC to have a long-term Sharpe Ratio up to 1 (depending on future risk-free rate which is currently almost zero). Recognizing that this is a topic most people have never been educated on, let me explain. This will help you understand how to more properly analyze returns of different strategies that have different leverage and therefore different risk. A huge mistake that I see retail investors make over an over is only looking at returns. The Sharpe Ratio isn't perfect either, but it's certainly better than only reviewing returns and can give you a way to throw a giant red challenge flag on anyone claiming extraordinary returns.
       

       
      Sharpe Ratio: Annualized return - risk free rate / annualized volatility
       
      All you need is a track record of monthly returns to calculate a strategy's Sharpe Ratio. For your reference, 1 is exceptional, and you'll be hard pressed to find hardly any audited track records of any type that have maintained a Sharpe of 1 over a long period of time (10+ years). Yet people are desperate to believe in fairy tales and hope that they've found magic. If a newsletter is honest with you and tells you to "get real", many retail investors will just move on to the next one who will tell them whatever they want to hear in order to gain subscriptions. We'll tell you to get real here. And if you ever feel like we aren't, throw the challenge flag at us. It's why we have forums in order to have discussions. 
       
      Steady Condors has had a Sharpe Ratio of about 1.3 since 2012 which is above long-term expectations. This is based on 19.8% CAGR (Compound Annual Growth Rate) and 14.6% annual volatility. With the expectations that Steady Condors will produce annualized volatility of around 20% over the long term, this would also land expected returns around 20%. 
       
      Beware of anything that suggests a massive Sharpe ratio such as 3+ over a long period of time. That would basically qualify them for market wizard status that virtually nobody has achieved for the long-term. Oftentimes you'll find this in a credit spread newsletter where the big loss just hasn't happened yet (it will), or the entire track record is hypothetical, which likely includes overfitting and/or excludes realistic transaction costs. Short volatility strategies like selling options with no risk management can sometimes go for a few years without being tested. Do yourself a favor next time you're looking at a track record and analyze both risk and return, and using the Sharpe Ratio is a great start and a way to possibly save yourself a lot of money.
       
      Thank you Jesse for providing such great explanation!
       
      At Steady Options, we are committed to promoting long term success to our members which starts with education on having realistic expectations. We will continue telling people to "get real" and not what they want to hear because this is who we are.
       
      On a related note, we are one of the few services that report performance on the whole account, not P/L on margin. For example, if we keep 20% of the account in cash and make $400 on $8,000 margin, we would report it as 4% return on $10,000 account. Most services would report it as 5% return. in the long term, it makes HUGE difference. We also include commissions in our reporting, which reduces the numbers by another ~0.3%/month. Always make sure to check how the service reports returns and compare apples to apples.
       
      Let me know if you have any questions.
       
      Want to learn more?
       
      Start Your Free Trial
       
      Related Articles:
      Why Retail Investors Lose Money In The Stock Market
      Are You Ready For The Learning Curve?
      How to Calculate ROI in Options Trading
      Performance Reporting: The Myths and The Reality
      Are You EMOTIONALLY Ready To Lose?
       
    • By Kim
      I can guess that many people in this industry are getting this question. 
       
      Today I got an email from Matthew Klein, CEO of Collective2.com, where he provides some excellent and perfectly logical explanation. Here are some major points.
       
      “Why would a good trader share his strategy?”
       
      That’s the question, then, isn’t it?
       
      If you create a good trading strategy, why let other people use it for a modest amount of money, rather than keeping it all to yourself?
       
      Actually, there are several reasons.

      Leverage and risk
       
      The same question can be asked of virtually the entire financial industry. Why do top-tier hedge funds accept investor money? If the guys at Two Sigma are so smart (and they are), why don’t they just trade their own money from an unmarked building in Soho? Why go through the hassle of raising capital from investors?
       
      Or more broadly, why have mutual funds? Why run a bond fund? If Bill Gross is such a genius (and he is), why does he bother accepting investor money, and suffering the indignity of annoying questions, or unfortunate P.R.? Why not trade his own private capital from his house in Laguna Beach, and when people ask him what he does for a living, he can just say, “I’m a beach bum. I don’t do anything.”
       
      The answer is: leverage (people want more of it) and risk (people want less of it).
       
      Even Masters of the Universe don’t have infinite cash sitting around. After all, many Hedge Fund Titans live in New York City: there are co-ops to buy, kids to private-school, restaurants to patronize. If you are a managing director at a top-tier hedge fund, and you have a million dollars in the bank, ready to invest, which would you prefer: to earn 20% on your money? Or 30%?
       
      Letting other people invest alongside you, and making money on their money, is a form of leverage. (For those not fluent in finance: leverage means using borrowed money to make more money.) Leverage isn’t always a good thing, of course (you can lose more, too) — but if you have high confidence in your trading ability, using leverage can be a wise decision.
       
      If you are a competent trader, and you have $100,000 sitting in your brokerage account, ready to trade, which would you prefer: to earn 20% on your money? Or 30%?
       
      Imagine you are a good trader, and you think that you can earn 20% each year on your $200,000 trading nest egg. Now imagine that selling your strategy on lets you earn an extra $5,000 each month in subscription fees from your followers. That’s the equivalent of another 30% on your capital. Sure, there’s no guarantee you will earn that, but if you build a good track record on, you can earn that much, and more. 
       
      So, just like a Hedge Fund Titan — or just like a mutual fund manager — you can gain “leverage” on your own dollars by opening your strategy to the public.


       
      Reducing Risk
       
      Allowing outside investors to trade alongside you, and pay you a fee, also reduces your risk. Let’s be honest about that. A typical hedge fund charges “2-and-20” — which means they charge an investor a fee of 2% of the money invested with them, plus 20% of the investor’s profits. That 2% is charged no matter what — whether the fund wins or loses. It’s called a “management fee,” and in theory it’s meant to cover fixed expenses that happen every month at a hedge fund, no matter what: you know, rent, administrative assistants, legal and accounting, blow.
       
      But money is fungible, and what you pay with one set of dollars is something you don’t have to pay with another set of dollars. One way to think of that 2% management fee is as a risk-reduction cushion. If trading doesn’t work so well in one month, you still get your 2%. When you’re managing a billion dollars, that’s a nice chunk of change.
       
      Now, listen, if you stink up the place six months in a row, most investors will flee and take their 2% management fee with them. But you’ll get a bit of leeway — more so if you have a long and distinguished track record behind you. That leeway reduces your risk. That’s what you gain by offering your strategy to other people, instead of just trading it alone.
       
      Building your career
       
      So far, I’ve discussed the financial reasons why a legitimate, talented trading-strategy creator would sell his system. But there’s another reason, which is not related to money, but, rather, to career development.
       
      Finance is a hard industry to break into. We’ve all read about the glamorous life of hedge fund managers, but how exactly does one go about getting a job at a hedge fund? You don’t fill out an application online, and — truthfully — unless you go to a top-five American university, you won’t see the face of a recruiter at your annual career fair.
       
      I’ve already written about how stupid hedge-fund hiring practices are. But indignation won’t change the world. The fact is, it’s ridiculously hard to get a job at a hedge fund, and in finance in general, and probably always will be.
       
      But there’s one thing “finance people” respect, and that’s money. Prove you can make it for them, and it doesn’t matter one bit whether you went to Harvard or Pomona State. Money talks.
       
      Running a public track record, with other people’s money at stake, is a different beast than sitting alone in your room, wanking your own tiny brokerage account. The pressure makes some people crack. 
       
      On the other hand, some people love performing in public — whether the performance is musical, or written… or financial. Some people share their strategies with the public for reasons other than money: they are building their career, buffing their resume, trying to break into the business.

      SteadyOptions
       
      Not all those reasons are applicable to SteadyOptions, but some are. But even if you don't buy any of those reasons, the only question you have to ask yourself: is the subscription service helpful to you? Does it help you to become a better trader? Does it help you to make money?
       
      If the answer to those questions is yes, this is the only thing that should matter to you. Why am I doing this is secondary.
       
      Happy trading!
    • By Kim
      Last week I came across the following Tweet:
       

      And the following followup the next day:
       

      1,300% return in one day??

      This is how the trade looks in ONE software at the time of the opening:



      ONE shows a maximum return of only ~7%. What is going on here?

      This trade is long one call and short 2 calls. Which means one of the calls is naked and requires huge margin requirement. 

      If you are not a member yet, you can join our forum discussions for answers to all your options questions.

      When the trade was closed on Apr.17, this is how it looked:



      Explanation for "1,300% gain"?



      This calculation ignores the margin requirement on the short options. When a trade requires a margin (like credit spreads or naked options), the return cannot be calculated on cash outcome - it has to account for margin requirement.

      As a side note, it was a good trade. No downside risk, and upside risk starts at 2,900 (over 100 points move in one day). But the gain was nowhere near 1,300%.

      Related articles:
      How To Calculate ROI On Credit Spreads How To Calculate ROI In Options Trading
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