Entry Prices during High Volatility Times

[BlackBat 66]

Speaking about attempting to enter trades ASAP after receiving the alert vs. patiently waiting for them to drop in price , @krisbee, you said a couple of days ago on the recent AXP topic that you didn't hurry to enter the official trades as they were posted but instead you just waited for them to drop significantly in price before entering, and it is true that during the last few months with elevated volatility many of them did have big drawdowns before showing any significant profit, so your approach seems definitely interesting. For the AXP trade you said you entered at $0.94 while the official entry price was $1.27, so you got it at more than 25% discount, and you were showing 46% profit, which is awesome!

On 1/4/2019 at 7:27 PM, krisbee said:

most of the RICs without chasing and waiting gave better price entry. Including the recent AXP, GS, FB...
I waited and entered all the official entries for better prices including AAPL, VXX, CRM as well.

A few questions / remarks:

1. What I understand from your message is that for all these trades which had large drawdowns you waited and entered the official entries later for a big discount. Even though at the time you entered you probably could have bought the ATM RIC strikes even cheaper than the official strikes which were not ATM any more. Or in case of RICs you actually entered the ATM-centered strikes? This question might sound naive but I just wanna make sure I got it right.

2. How do you determine your target entry price for all those trades? Do you just subtract 25% of the maximum risk from the official price or is it a more complex process?

3. Is your position in dollar terms proportionally smaller than the official one, because of the discount you got for the entry price? Or do you buy more contracts to aim for the same allocation in dollar terms? For example, did you still buy 4 AXP RIC contracts like in the trade alert (of course, multiplied by how much larger your portfolio size is comparing to the official $10k portfolio) or did you buy 5 or 6 of them to make up for the 25% discount that you got?

4. Waiting to get all the trades for a significant discount guarantees that we enter ALL of the losing trades, including those with 100% loss, since we don't really have a stop loss on the trades, while we inevitably miss the (not so many) trades that were showing little to no losses before reaching the profit target. This seems to lower the profit potential of this strategy.

5. I also thought on the idea of averaging down, so scaling into the position in several steps, aiming for an even lower entry price at each step (but without exceeding the targeted position). While this might give us a better entry price for most of the trades it will also cause us to miss trades that are winners from the beginning (or to book those profits only on a much lower allocation than the targeted one) and, on the other hand, we will book losses on the full targeted allocation and these two points might obliterate the advantage of getting better average entry prices on the rest of the trades. So I am pretty confused on which approach would be better.

6. Waiting to get (much) better prices for the official trades that hedge one another seems risky business and I speak from my own experience: roughly one month ago when I had a 15% allocation on the three VXX ratio spreads that we had open at that time but was still trying unsuccessfully to enter the official SPX butterfly trade that kept increasing in value right from the beginning as it was opened while SPX was dropping and hasn't recovered sufficiently to get the butterfly's price low enough for entering, so I ended up with three losing VXX ratio spreads but missed the 36% gain SPX butterfly trade which should have covered those losses. Maybe in this case I should have probably opened the fly at lower strikes but I was not confident enough that those strikes would have been well positioned for the trade to be successful, so I kept hoping that I could enter the official SPX butterfly at some point, which did not happen. Anyway, since SPX flies that reach 36% gain without showing any significant loss in between are pretty rare, maybe in the long run it is worth waiting to buy official SPX flies at a 25% discount.

So, to me, waiting to enter at much lower prices seems to be a potentially successful approach to the extent that a sufficient percentage of the total trades have big drawdowns before showing decent profits, and the discount you get on entry is big enough to make up for the few 100% loss trades that you will inevitably have and for the winning trades that you will miss because their price did not ever drop to your expected entry price.

Would love to hear other opinions about waiting to get better prices in this high-volatility environment.

Edited January 6, 2019 by BlackBat