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I'm﻿ plea﻿sed to let you know that our long time mentor @RapperTwill start sharing his options on commodities futures trades as a separate  portfolio. I will let him to introduce the system.

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Thanks @Kim

So as I said on the commodity board, this particular system is the brainchild of my business partner (and brother) John.  I will post his overview below and then give a schedule of what to expect in the next few days.  John will be joining up and chiming in shortly.  The formatting from the copy and paste is a little odd, sorry about that, wont let me edit.

Commodity Trend Following System Using Options

## Introduction

thanks

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Where do we see the trades and how do we get notified?

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29 minutes ago, Kim said:

Just to clarify, 25k account size is recommended in order to be properly diversified and still keep at least 50% of the account in cash. Average position size could be anywhere from $500 to$2,000. So theoretically, you can trade with smaller account, but it will be much riskier.

Thanks Kim.  yes we dont want to exclude anyone but in small accounts, the positions would be larger relative to account size (hence increasing risk)

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24 minutes ago, NJ_KenRob said:

I know there are currently 4 commodities that are being traded.

I guess my question is what drives the selection of the underlying commodities and,

is this a situation where risk is reduced by being in a greater number of underlyings?

In other words, can you start with a subset of the 4 commodities, and add the additional commodities as one gets comfortable with the system and amount at risk?

a:  yes more commodities reduces risk, we will be going up to ten over time.

b:  if you trade the system, you need to take every trade every week.  We dont know when/where the winners will come.  Obviously we willadjust risk exposure per position as we add new tickers. Jerry Parker (one of all time greats) has a story about returning something like 35% one year in one of his systems and it was all in one month on one underlying.  Im paraphrasing but you get the picture, i will  find the actual podcast.  We have a post forthcoming on this but if you have larger accounts, my suggestion is trade smaller at first but commit to a long period of time (several months at least...the longer the better).

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32 minutes ago, Noah Katz said:

Thanks.

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On 12/9/2018 at 5:58 AM, RapperT said:

It was important to me to have the system only be long volatility (debit trades) on options. I know there is a ton of confusion around selling theta driven by people with a vested interest in getting people to trade a lot. I don't want to get into it here but selling far OTM options is a really dumb idea. My system would only be long options. I'm happy to walk anyone through (in a non calculus way) the math behind why selling options is dumb and theta is empirically and theoretically not an edge if there's interest but for this post let's just say, I'm only interested in long volatility.

Hi,

Can you please briefly explain why selling options is not a good idea ? I am really intrigued by your statement because lot of theory and trading out there emphasizes on option selling.

Do you mean option selling is not a good idea even when IV is high ??

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48 minutes ago, Manish71 said:

Hi,

Can you please briefly explain why selling options is not a good idea ? I am really intrigued by your statement because lot of theory and trading out there emphasizes on option selling.

Do you mean option selling is not a good idea even when IV is high ?? ﻿

Hi,

I do sell options on occasion when IV is high.  There are a couple of caveats though.  First is I have to have a reason for thinking IV is high.  Usually that reason is that is high in relation to other options in the chain or high based on some model I have.  If every option in the chain has roughly the same IV I'll probably assume that is a pretty good forecast of volatility unless I have a model that tells me otherwise.  When I sell options they are always close to at the money and hedged.  They're hedged because I don't like the risk payoff of a naked short option.  They're at the money because the impact of gamma on your position when a short far out of the money trade goes against you is catastrophic.  I realize a lot of people don't agree with that.  I have no problem with "income" trades in general (butterflies, Iron Condors, etc).  I do think people that suggest selling naked far OTM options is some sort of edge are just wrong.

From an asset pricing standpoint all asset pricing is based on the "fair game" assumption.  I think that this is usually a good assumption.  Under the classic BS model this means that the expected returns from theta will be offset by the expected returns from movement in the underlying. This means that if selling theta mechanically was an edge than everyone would sell theta until the price of the option dropped and the edge went away.

In the case of this system we are not modelling the underlying volatility of the future to price the options better than the market.  We're using options to take a directional bet on the underlying future.  In that case we want to be long vol because it gets us the risk/return profile we need to make the system's P/L attractive.  This is because we're counting on fat tails in the return stream of the futures to continue to occur.  A long vol trade lets us capture that.

-John

Edited by Jjapp

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2 hours ago, Manish71 said:

Hi,

Approximately what kind of returns can you expect ? Lets say you allocate 30% of your $25k futures portfolio to commodities trading and the rest is in cash. Can you beat S&P return ? Thanks. ﻿ We're working on a post that covers position sizing, allocation and leverage. We're trading options on futures both of which are highly leveraged so staying small is important. The good news with that is you should have a lot of cash left in your portfolio. @RapperT covered some historical performance of trend followers here: That's probably a good place to start. We're working on some overall system stats we will share. #### Share this post ##### Link to post ##### Share on other sites On 12/9/2018 at 5:58 AM, RapperT said: This allows me to reduce risk on commodities that have been trending favorably as needed (in some cases add risk back on) and add risk for those commodities that lost money over the previous week. Pardon my ignorance or understanding, but why does risk increase when the trade trends favorably and risk decreases when it is in red ? Should it not be the other way around ? #### Share this post ##### Link to post ##### Share on other sites 9 hours ago, Manish71 said: Hi, Can you please briefly explain why selling options is not a good idea ? I am really intrigued by your statement because lot of theory and trading out there emphasizes on option selling. Do you mean option selling is not a good idea even when IV is high ?? Site like TastyTrade became very popular in the recent years. They are using those highly catchy reasons like "80% of the options expire worthless, so selling them gives you an edge.", "Options Selling has high probability of success (80-90% winning ratio)." etc. But try to ask them for their track record, and they will use all kinds of excuses why they cannot provide it. Those who followed those guys can see what happens when you are short vega short gamma and volatility spikes. The last few weeks are the best example. As @Jjapp mentioned, it doesn't mean you should not sell options at all. But having onlyoptions selling trades in your options portfolio is a certain path to ruin. I know many tastytrade style followers will not agree with us, but the track record is the best proof. Numbers don't lie. Tastytrade has been trying to prove for years that buying premium before earnings doesn't work - and we are debunking their "research" time after time. More details: #### Share this post ##### Link to post ##### Share on other sites 9 hours ago, Jjapp said: Hi, I do sell options on occasion when IV is high. There are a couple of caveats though. First is I have to have a reason for thinking IV is high. Usually that reason is that is high in relation to other options in the chain or high based on some model I have. If every option in the chain has roughly the same IV I'll probably assume that is a pretty good forecast of volatility unless I have a model that tells me otherwise. When I sell options they are always close to at the money and hedged. They're hedged because I don't like the risk payoff of a naked short option. They're at the money because the impact of gamma on your position when a short far out of the money trade goes against you is catastrophic. I realize a lot of people don't agree with that. I have no problem with "income" trades in general (butterflies, Iron Condors, etc). I do think people that suggest selling naked far OTM options is some sort of edge are just wrong. From an asset pricing standpoint all asset pricing is based on the "fair game" assumption. I think that this is usually a good assumption. Under the classic BS model this means that the expected returns from theta will be offset by the expected returns from movement in the underlying. This means that if selling theta mechanically was an edge than everyone would sell theta until the price of the option dropped and the edge went away. In the case of this system we are not modelling the underlying volatility of the future to price the options better than the market. We're using options to take a directional bet on the underlying future. In that case we want to be long vol because it gets us the risk/return profile we need to make the system's P/L attractive. This is because we're counting on fat tails in the return stream of the futures to continue to occur. A long vol trade lets us capture that. -John I agree. The real edge is in being open minded and flexible. Knowing that there is a time and reason where buying options is preferable, and vice versa. I think one is setting themselves up for failure to ONLY sell options because the reasoning is not sound. I also very strongly agree that, when you are a net seller, you HAVE to be hedged against any form of open ended risk (Cordier as the most extreme example).. ,I also think that the concept of buying options has been generalized by those in that camp to only mean buying OTM options and holding until expiration, "hoping" for an outsized, unrealistic move in the underlying which will mostly never happen. Nobody ever points out all of the other ways one can buy options. One of the basis of their arguments is that options are a "wasting asset", and because of time decay, statistically you WILL lose over the long run. They never mention a situation like buying a 30 day, 50 delta option, for leverage,and holding it for 1-2 days, to catch a 2-3% swing in the underlying. Are these part of the xxx% of options that expire worthless? How much time decay is there on a 4 week option when held for 1-2 days....or a 50/25 (delta) vertical held for 1 week? The reasoning is totally flawed. I have done well both as a net buyer, and seller , of options by having some sense of when the time is right for each method. But, over the long run, I definitely have earned more on positive gamma, long option trades, when held for "reasonable " amounts of time. The Tasty Trade people are screaming and shouting about how great the current environment is because now that IV is high, they can just sell sell sell, with abandon. I would really like to know exactly HOW they are going about their selling. My guess is that, over the long run, it is not going to be a pretty picture. And pushing this on their "followers" is totally irresponsible, and they will have a lot to answer for when these people blow up. Edited by cuegis #### Share this post ##### Link to post ##### Share on other sites 6 minutes ago, cuegis said: The Tasty Trade people are screaming and shouting about how great the current environment is because now that IV is high, they can just sell sell sell, with abandon. I would really like to know exactly HOW they are going about their selling. My guess is that, over the long run, it is not going to be a pretty picture. And pushing this on their "followers" is totally irresponsible, and they will have a lot to answer for when these people blow up. And the problem is that they hide behind all kinds of excuses in order not to provide their track record. And if they do, they talk in dollar terms which is meaningless - the only thing that matters is percentage gains. #### Share this post ##### Link to post ##### Share on other sites 12 hours ago, Manish71 said: Hi, Approximately what kind of returns can you expect ? Lets say you allocate 30% of your$25k futures portfolio to commodities trading and the rest is in cash. Can you beat S&P return ?

Thanks.

I would suggest reading the AQR article in the thread JJapp linked.  Trend systems have a long history of outperforming standard benchmarks over the long run.

The point is this strategy is less about beating a particular index and more about exposure to a market with basically no correlation to equities with significant upside relative to risk.  That said, yes our system has done quite well relative to us equities during our short period of live trading and we will be posting these results.

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7 minutes ago, Kim said:

And the problem is that they hide behind all kinds of excuses in order not to provide their track record. And if they do, they talk in dollar terms which is meaningless - the only thing that matters is percentage gains.

Just on it's face .."we NEVER, EVER buy options under any conditions ever!" is SO dumb,and irresponsible.

I remember watching one of their extremely curve fitted studies showing that it was ok to allow yourself to sell naked straddles/strangles because the kind of "blow up" type of move only has occurred less than once a year going back 20 years.

Their point was to make people feel comfortable, and ok, with selling an open ended, non defined , position, because the ("their") statistics prove that it almost never happens.

Until it does (they left that part out)

Edited by cuegis

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6 hours ago, Manish71 said:

Pardon my ignorance or understanding, but why does risk increase when the trade trends favorably and risk decreases when it is in red ? Should it not be the other way around ?

you have to take this quote in context of what John was saying about the weekly nature of adjusting positions.  All he was saying is that we factor historical vol when deciding what our allocation to a particular option should be be in a new week.  The deltas of the trades will often change from week to week to fit our model portfolio risk profile.