GTC 15% Gain Orders

[Guest Corto]

Kim, all:

After around 60+ trades since Sept 21, I have counted a total of 2, possibly 3 of my earning trades having hit a 15% sell limit GTC order I generally put in on all my trades when opened.

I wonder if you could speak to this a little bit. I know it is outrageous to think that a majority of trades would cash out at 15% gain without any work on my part, but the rate right now is less than 5%. Which means the remaining 95% of the trades I have been making require active management either in rolling and/or last couple hour tight monitoring on the day before earnings.

Even if I dropped the GTC gain limit to 10%, the rate only goes up to 4 or 5 trades out of 60+ for me.

If I dropped to 5%, I get to about 11 trades that would have hit limit sells, but it gets to diminishing returns after round trip commissions and time spent entering and tracking and monitoring, tough to justify the time and effort to make $35-$45 on a $1000 trade. Maybe that is a poor way to look at it, but there is a point that a profit is small enough that the time involved overshadows the money.

Just an observation. I hope to see the hit rate improved, and would be interested in veteran subscribers experiences.

Thanks,

Mike

[Kim 7,436]

Mike, I counted 12 trades with over 10% gain: WAG, NKE, YUM, WFC, CREE, AMZN, LNKD, CF, JCP, GPS, GPS and GMCR. I didn't include GOOG and MA. That's 20% of the trades. If you go further in time, the percentage of 10%+ gainers will be much higher. I agree that 5% is not a good target, but 10-15% is very realistic.

[Marco 221]

If you have an automatic 5% take profit (via GTC order) I think you lower your average return quite a bit and might not even break even with the losers that we have. You need some 10%+ winners to make the balance positive. A 15% GTC sell order doesn't mean that you expect all trades hit that target. For me it just means that this is a level of profit that I'm quite happy to take in the current market environment (pretty low vol). If the trade never hits 15% profit then I wait til the last day and see what I can get for it.

The GTC order is merely that you cash out should something happen to the stock and you don't have to watch it all the time.

[Guest Corto]

Kim,

I don't dispute your numbers. Rightly, or wrongly, I figure in commissions into the final % number and even with IB's low rates, I am not seeing that many over 10%. I certainly understand for your purposes of tracking and performance calculations you can't include commissions and respect that.

Slippage is also a problem. I would say I am only able to get in at your exact entry price 50% of the time, even when waiting. The other 50% is always a penny to a few pennies higher which on a lot of these trades ends up being 1-3%.

Execution has to be perfect for a lot of these to get above 10%. I hope it is plain to see that while your headline performance numbers are very impressive, which is one reason I subscribed, real world ability to get those numbers is not at all easy when factoring in slippage, commissions, and time available to track.

Let me cite a current real world example. KR -- you got in at 1.26. I got in at 1.27. After commissions, my resulting entry price is 1.28918. I think you'd agree that 1 penny off your entry is not bad, and the commissions are what they are with IB, generally the lowest around. However, that already puts my result 2.3% below what you will be able to post. Say it hits a 15% gain target for you, 1.449 and you exit. I follow your exit and assuming same commissions and 1 penny slippage on the exit for me, your 15% exit equates to a 10.4% exit for me, or almost 31% less! And I cannot ever see any consistent way around that happening on virtually every single trade.

Marco,

That's exactly what I do. I would be ecstatic to see more hit the 15% targets, even if I am leaving money on the table.

Mike

[Marco 221]

I think in the mid to long run you should try and 'learn' the methotology that Kim uses rather than waiting for his alert. Look at the candidates for the next week and do your own analysis (maybe to begin with still trade Kims alert but paper trade your own entry and see whether you can do better - problem with that is it's hard to get a feeling for the real fill as you don't know how much spread you woul have paid) When Kim opens a discussion he often puts in what he considers a reasonable price (if you get more experienced you might make up your own mind about a good level). You can then get in before the offical alert and might get it cheaper or more expensive than Kim but at least you won't be chasing a price at the same time other members might try to get into the same option. Hopefully that will reduce slippage on the entry. On the exit - if you paid a penny more than Kim try to get out 1 penny higher than him - I'm not following his 'exit performance' but I would be very surprised/impressed if he always sells the high. I think the 'chasing' on the exit is not as bad as on the entry as I see many members posting their exit on the forum before the official alert so I guess people are happier to have their own exit target once their in.

[Guest listolyman]

I agree with Mike. I have found it difficult to break even following this strategy. Kim, i know that your results are real but there seems to be a lot of time energy and experience needed to break even with this strategy much less turn a profit. Unfortunately, i have missed some of the 10% winners due to slippage, price has jumped by the time that i place my order, or inability to exit close to your price.

[Kim 7,436]

I think that KR is not a representative example. Slippage and commissions play bigger role in lower priced stocks, but the average price of our trades is around 3.50-4.00. 1-2 cents slippage on $4 straddle is less than 1%, and IB commissions should reduce the gains by less than 1% as well. Also, I can give you tons of examples where members got better prices than me. Take the TIF example - I paid 4.19, I have seen fills as low 3.75. I paid 3.95 for the CRM trade, many members got it at 3.50. So it goes both ways. Many members start with partial position and average down if the price dips - this is something I cannot do for the performance tracking purposes. Same holds for exits, just see the latest GMCR trade as example where many members got better results. And I agree with Marco about being more independent.

The bottom line is that execution is important in any strategy, and this strategy is no different.

[Marco 221]

another thought: if you say you struggle to break even - do you include the Calendar/Butterfly/IC trades in that?

Even if you only break even on the earnings plays. They provide a good hedge vs. any market disasters and make the combined strategy superior to any '5% a week' condor letter you can subscribe to.

I'm trading this actively since April and my average return including comm is 1% per trade over 94 trades. In the same time Kim did 147 earnings trade and if I deduct 1.5% comm per trade he posted 2.2% per trade (I only took pre-earnings trades into account here, not counting income trades or trades he held trough earnings and this is only April - Oct) So just like you I'm trailing Kim by quite a bit however the trend is positive for me as I gain experience. Even if you 'only' manage to get to 1% after comm per trade - over 94 trades thats 940$ assuming an allocation of 1000$ per trade or a 9.4% return in 7 months so ~16% p.a. but thats before I take my 'income trades' into account. Thanks to the earnings trades 'hedge' I can do much bigger size than I did before so taking these into account my YTD performance looks much better than that

[Guest Corto]

I am doing partial entries and holding some back in case of a drop, doing that right now with TIF. I have gotten some better fills than you, yes. Most have not been though.

I don't keep a completely detailed spreadsheet, but certainly a lot of the trades have been in the $1-$2 range.

There seem to be more and more constraints that I (only speaking for myself) have to put on trading this system! Please don't take this badly, but after this discussion and my previous experiences, this is where I am at:

--Only take earning trades. Calendars and flys try to pick a direction which is against the basis of the whole IV strategy and are too easy to get burned on.

--Only take earning trades where I can get in at the exact same price or better than Kim (I see my trade volume getting cut in half if I need to enforce this!)

--Limit trades to 10% of the amount allocated to SO trading

--Kim is really a teacher and you still need to do your own research on whether the trades are going to work out, or find your own after learning. Sorry, really, no disrespect intended (really, please don't be offended), but this one is a problem. Bottom line is the subscription pays for your experience AND the trade alerts. If I can't trade those alerts successfully, then the SO method fails for me.

Marco, just saw your response. My first reaction is 1% per trade is poor. When you put numbers to it, it is better, but still a lot of work and nowhere near the posted performance.

[Marco 221]

a few more comments:

>>I don't keep a completely detailed spreadsheet, but certainly a lot of the trades have been in the $1-$2 range.

I do have a spreadsheet with all my trades, helps me to analyse what works and what doesn't and I can only reccomend that however I appreciate that some members might be too busy

>> --Only take earning trades. Calendars and flys try to pick a direction which is against the basis of the whole IV strategy and are too easy to get burned on.

I think this is where you are wrong. I consider the earnings trades almost as a hedge to my short gamma trades now. If that hedge earns me 16% p.a. rather than costing me money that's fantastic. Go to the performance page and look how much you have missed this year not doing the IC's/Calendars and butterflys. The two strategies do complement each other quite well. There is a market scenario where both do badly (small grind up - over a few weeks you have a big enough move to make the income trades a loser (however you can still adjust them) and the dropping IV/HV hurts the earnings trades) but we had that this year and still went trough it quite well. In all other scenarios (volatile crash or rally and side wards market) at least one leg of the strategy does well, so I think you're missing a trick here doing only one leg.

>> --Limit trades to 10% of the amount allocated to SO trading

would agree on that, position sizing is very important

>> --Kim is really a teacher and you still need to do your own research on whether the trades are going to work out, or find your own after learning. Sorry, really, no disrespect intended (really, please don't be offended), but this one is a problem. Bottom line is the subscription pays for your experience AND the trade alerts. If I can't trade those alerts successfully, then the SO method fails for me.

from ym above response I think this is what you should try and get out of SO - trading experience and knowledge. The profits should hopefully follow.

>> Marco, just saw your response. My first reaction is 1% per trade is poor. When you put numbers to it, it is better, but still a lot of work and nowhere near the posted performance.

I did the numbers game above already. Anualising Kims numbers for April to October he does ~ 252 trades per year (again only earnings trades) if you manage to take say 200 of them and make only half his avg. performance (so 1% per trade rather than 2.2% or so) you still have a 20% p.a. performance (10k portfolio, constant 1k allocation) add the income trades and you'll do much better than that, increase the allocation to 10% of a hopfully rising portfolio rather than a fixed 1k and you boost performance a little more

[Kim 7,436]

Mike,

Many traders trade income trades exclusively for years with excellent results. Those trades don't pick direction, that's the whole point. You might say that they pick direction in terms of "no move", but any trade has some kind of bias in terms of delta, vega or gamma. For me, the earnings trades and the income trades are a perfect mix.

When analazing performance, don't forget that numbers presented by Marco refer to return on overall portfolio, while we have 30-50% in cash most of the time. So to compare apples to apples (with other services for example) you will have to increase the allocation beyond 10%.

You yourself mentioned that you are currently about breakeven (removing the ADM trade). So if you managed to breakeven after two months during the worst period in SO history using new strategies and not taking the income trades, I would say it should be very encouraging.

[cwelsh 1,497]

If it makes you feel better, I don't get the posted performance either -- but I certainly get positive returns. I average about 2-3% per month, or about 25-30% per year. That's #*($ incredible for anyone.

I lag behind for several reasons (1) I trade in larger blocks and slippage is a major problem, I frequently have to spend an hour getting out of a trade, (2) I've missed a couple of the big winners due to my day job on trades I just did not do, while I managed to catch the big losers -- that's just a bad break, and (3) greed -- some of my biggest losers I elected to hold through earnings, and that, by and large, is just stupid.

This is a GREAT post though, Im always interested to learn what issues members have, why, and how to improve the forum for everyone (no I don't get paid to say that either). There are not a lot of communities out there that discuss specific trading strategies like this one.

I also, when I cannot be near a computer and know I won't be, use a GTC at 10%, not 15%. If Im active on a day, I'll remove it and try for higher.

[Guest Corto]

Marco, Kim, Chris:

I really appreciate your responses. Maybe a better way to state the reason I don't take the non-earning trades is because I already feel I have enough other exposures to the market that I want to stay away from that type of trading in SO.

The reason I joined is the enticing aspect of the earning trades in that they takes both sides, and it is very difficult to get burned by any large amount this way. Small losers are certainly expected. Just waiting for more consistent decent size winners and trying to convince myself I can get near Kim's performance over time, or even 50% of that and I will be golden.

Mike

[Kim 7,436]

For me, the biggest advantage of any trading system is to keep the losses and overall drawdowns small. Look how many services just put 3-4 condors every month, get 5-7% every month and then get burned by 30-40% losing month. With directional trading, it's even worse. Our largest drawdown was in October - about 6% of the overall portfolio, and most of it was caused by RHT loss.

Now, let me put things in perspective. The average return of our trades in 2012 is 3.5% (including the income trades). IB commissions will reduce it to ~2.5%. Even if you consistently get 1% less than the official performance, it is still 1.5%. If you take just 10 trades per month (less than half than we take), you get 1.5% per month or 18% per year with 10% allocation. Now remember - that's not a real ROI since we have about 30-50% in cash most of the time. Take all the trades we take (about 22 per month) - and you are at 3.3% per month or 40% per year. And remember - that includes few big and unnecessary losers (RHT, AKAM etc.), and assumes that your fills are 1% less than mine on average, which I believe can be improved over time. Plus you use on average only half of your portfolio.

P. S. This assumes no compounding. Since you could easily compound with half of the portfolio sitting in cash, the results would be even higher.

[Kim 7,436]

I think the last 2 days present a good example how many members get better results than me:

GMCR: I got 4% gain, many members got 6-8%.

TIF: I lost 3%, many members were able to book a winner.

GES, ARO and KR: all went 5-10% higher shortly after I sold. In fact, by the time you got the alert, you could probably sell 2-3% higher in some cases.

Mike, I just noticed that you entered LULU before I did and already are up 7-8%. This is how I want members to utilize the forum. I provide the research and the data, members should use this data to make their own decisions. I'm sure that over time, you will become better and better on this.

[Guest Corto]

Agreed! Today was a good confidence booster.

Mike

[cwerdna 12]

Also, I can give you tons of examples where members got better prices than me. Take the TIF example - I paid 4.19, I have seen fills as low 3.75.

Heh. That was me.

I haven't had time to read and comment on this entire thread yet (will do so later) but I've been focusing mainly on the earnings trades. That was my only reason for joining. The other non-earnings plays are sometimes difficult for me to grok (the reasoning, where things stand, etc.) as an options amateur. And, executing them requires being real careful w/TOS (I don't want to do it w/IB).

As I've mentioned a bunch of times before, I tend to set multiple GTC limit sell prices after I've entered a position, at varying gain levels (e.g. 20%, 25%, 10%, 15%, etc.) Sometimes at market open, option prices get wonky and I might luckily get a fill one of those, esp. the higher values.

I've also now tended to (right or wrong) avoid SO plays that involve massive theta decay. I prefer if they don't involve weeklies (or anything very close to expiration). I avoid it or use a monthly option instead. I'm leery of the IV not rising enough to make up for the theta decay.

I honestly am contemplating leaving (sorry Kim, no offense intended) given that I haven't been net profitable even when excluding the anomalies due to Sandy and user error on my part. I think at this point, I might only enter SO earnings trades if I'm able get a much lower entry price than Kim.

I tallied up my results, tossing the anomalies and user error, and for me, the problem was, I had losers outnumber winners in # and $ amount. I couldn't get into many of the plays. Also, this trading ends up taking a fair amount of my time to babysit and causes me sleep disruption (& repercussions after that), mainly on days where I need to close positions.

My position sizing also ends up being a bit uneven because of multiple limit buys at various prices (some at Kim's entry price, some lower and some no higher than 1% above) and how "lucky" I am to get in a few, none, many or all. If I'm unlucky where I got a BIG position and it's a loser, that sucks.

I'd been doing some other plays that tie up a lot of my buying power but at least mostly win and disrupt my sleep a lot less.

Edited November 29, 2012 by cwerdna

[Kim 7,436]

I think that the relevant question is not if you can replicate the SO posted performance. Commissions and slippage are part of any newsletter performance. As shown above, over the long term (not 2-3 months) members should still be able to make around 3-4% per month even after commissions and slippage, non-compounded, with half of the portfolio in cash on average. Does it require some effort? Definitely. I never promised anyone that they can "spend only an hour per month and make thousands every month". Is it worth the subscription fee? That's for you to decide. I know that most hedge fund managers would kill to get 3-4% per month, but that's your call.

The important question is not how much SO makes, it's how much you make. If SO performance shows 4-6% per month after commissions and you are not able to breakeven, you need to ask yourself why? There could be several reasons:

1. Poor execution - chasing trades, holding through earnings, not exiting on time?

2. Playing only selective trades, skipping the non-earnings trades or trades with higher negative theta and missing some of the bigger winners down the road?

3. High commissions? If you buy a $3 spread and pay ~0.75 with why IB, you reduce the P/L by ~1%. If you pay 1.25, you reduce the P/L by 1.7%. That's 0.7% difference. On 250 trades per year, that's 175% cumulative difference.

4. Position sizing: do you allocate larger size to losers, or allocate larger size after a losing streak in order to get back to even?

The bottom line: is the underperformance caused by poor SO performance? Are you able to do better on your own or using another newsletter?

[Guest Corto]

It looks like the question for all of us relative newbies is do we want to suck it up and stick it out through what has been a poor period in SO performance in hopes that longer term it all evens out? The past week for me has shown a turn in most trades starting and staying green from the beginning, so that is a good sign. My trade sizes are still in the 1k range each, so none cause me to lose sleep.

Personally, I need to make this work with just the earning trades. I have been following the GLD and SPY discussions the past few days and the rolling and adjustments, etc, turn those trades into way too much work for the time I have available. If I can't make it work with just the earning trades, then I will need to move on as well. But the signs are turning positive, and experience does help.

Mike

[Marco 221]

I guess all it took was for you to moan a bit and Kim has a big green streak again

[Kim 7,436]

lol.. maybe we can make it a habit.

On a serious note, even October which was our worst month would be positive without 2 big losers (SPY calendar and RHT straddle). The winning ratio was below 50%, but all losers have been in the 4-7% range while most winners have been double digit.

As for theta positive trades - with introduction of the new weekly options, I will probably start doing shorts with 2 weeks expiration instead of 1 week, which means much less maintenance and adjustments.