March 3, 2018
Andrew Falde
SMB Options Desk Trader

Yesterday in the Trading Conversations webinar, I was asked for an update on the SPX Netzero Options trades. It was perfect timing because a few minutes before the webinar started, I was approved to put my largest size on the SMB Options Desk into a CL (Crude Oil) Netzero. After mentioning this, several emails and slack room messages came in asking for the reasons for this change. The following answers the common questions which I have been receiving regarding this update to my trading plan. 

My shift in focus from index options to commodities options began over a year ago when, in October 2016, I had the opportunity to spend a month at SMB where Merritt Black introduced me to the benefits of the CL futures market.

The cause for my shift from equity indexes to commodities is not because VIX is now too high or that it was just recently too low. It’s that we are facing a regime of large gyrations in Implied Volatility and the potential for extreme IV short covering. The ability to control risk in equity/index options trades is more challenging than it was from 2009 through 2017.

Implied Volatility on equities has become part of a financial engineering game of musical chairs. The music has already stopped one time, and XIV and SVXY are essentially out of the game.

A big factor in the decision to execute any trading strategy is the risk-adjusted return of the strategy. I use potential drawdowns in trades as the denominator and the annual expectancy as the numerator. For now, that relationship is not adequate for me to trade negative Gamma index options trades. The only solutions I have found for the current environment come with extreme complexity, tremendous execution risk, and rapidly increasing commission cost to expectancy ratio.

The commodities futures markets are not a part of this financial engineering game and CL has the key characteristics needed for good option spread trading, and with much more favorable risk vs. reward. Some other benefits of CL options are that they are easier to fill, trade overnight, have a great vol skew for trading both sides of the market, etc.

Something that I’m very excited about is that the Netzero concept and it’s 60-40-20 trade plan have converted over to CL without a single modification. There are some differences to get used to (the 1,000 multiple instead of 100, low price underlying, splitting strikes more often), but these issues are quite minor and take only a few days to get used to.

We are actively discussing the CL Netzero trade in the Options and Systems Workshop, and I hold a live Workshop Meeting every Wednesday to discuss various topics including CL Netzero, volatility trading, long and short options strategies for equities, algorithm development, market statistics, and more.

The Workshop Slack room is the best place to get ahold of me, have discussions, and work with other traders that are seeking to improve their trading; and I would love to have you try it out.

You can learn about the workshop at smbu.com/workshop

-Andrew Falde

Important Disclosures

One trader at the firm underperformed this month.  In his own words, he is in a nasty losing trading streak.

He is a developing trader and working to be consistent.  He actually was an SMB Training student who impressed us so much, he was hired to trade on our desk.

During a one-on-one mentoring session with this trader, he quickly found connections for his poor trading.  He lacked proper sleep one session.  He ate poorly the night before another session.  In a tailspin of 8/9 poor trading sessions, he felt they all could have been avoided.

For the record, even with this poor trading he still finished positive for the month.  So there is good in his trading and an ability to trade with edge.

The key for this trader is to trade his A+ PlayBook trades.  The tailspin is a result of this trader not taking enough of his A+ trades.

So should this trader work on his poor trading?  Or should the trader double down on an optimal personal routine that ensures he will take his A+ trades?

Think of how differently this month’s goals would be.  On one hand, trader tries to trade his A+ trades better.  With another approach, trader focuses his energy on completing his routine that leads to taking A+ trades.  The first approach imbibes trader with pressure and stress.  The later with an emphasis on process and the little things that measurably breed better trade choices.

The trader can trade with edge in A+ trades.  The focus ought to be on how he takes more of them.  The solution is doubling down on the routine that leads to A+ trades and eliminating the destructive behavior that manifests banging into lesser trades.

In walking through this solution with this developing trader, I mentioned as primary source evidence another trader on the desk for whom this approach is paramount.  This other trader went 30k plus, 30k plus, negative, 30k plus the past four months.  Getting this other trader back on track was an issue of a focus on his routine of best practices.

Both of these traders have edge, so you need that first for this focus to work.  But often it is not the poor trading that ought to be our focus, but rather the poor adoption of our routines.

In winding down our conversation, the developing trader predicted, “this month is gonna be great.”

*no relevant trading

In his monthly review, a now consistently profitable trader highlighted a major achievement.

I grossed well over 15k and compared to other months I didn’t incur too many fees (trading commissions and locates). I had many 4 fig days and my biggest day to date of 4k. Month over month I saw huge growth and believe I am on track to achieve my 150 – 300k goal.

Worked off fees and receive paycheck – big milestone for me.

This is huge. Psychologically this is a great deal for me. Finally, I am getting paid from trading. (edited) after 1.5 years I can now just focus on growing as a trader and being able to support myself comfortably. This is a game changer for me.

There is a very real learning curve as a trader.   Those willing and able to withstand the learning curve, work, have ability, and find edge in time can become profitable.

What I have not mentioned yet, is the discussion this trader asked to have with me about whether he ought to continue.  This trader who is now tracking to earn a White Shirt this year was faced with a serious decision about whether to quit or give trading some more time.  I suggested we needed another 6 months of data at the time.  Personally, I thought he was doing just fine.

This trader was making money, although not enough.  Trading was what he loved (some really don’t and ought to move on).  He did the work.  He fit in very well at the firm.  He was improving.  He was showing consistency.  To me it was more just a matter of time before his results would enable him to support himself via trading.

Thankfully, he kept going.  Now the future of being a successful trader is real.

But he seriously wanted input from his Senior Trader and partners about whether he should continue.  I counseled he should and was willing to support this effort.  His Senior Trader voiced he ought to press on.

Often I say to interview candidates it takes 18 months to 2 years to learn if you can make.  You can.  It appears this trader will.   It took 18 months.

For those not 2 years in and not yet seeing your desired results, it might just be a matter of time.

*no relevant positions

We are only as good as the stocks that we trade.  Traders prepare before the open for what and how they will trade- Game plan.  The best traders leave room to observe what is working best, that may just be outside their game plan.

One firm trader in his Daily Report Card, wrote on this topic:

One thing I went back and looked at/thought about….. the stocks that were really working ie CLSD, I should’ve found a way to be more aggressive.  Over time, if I can learn to shift that focus in real time and make that realization, there are opportunities to make my day in one stock.  I think today especially, it was hard to do with so many names of interest on the open, but a deeper morning preparation can help.  Ie, going mentally thru more scenarios.

Dr. Steenbarger, who works with this prop trader, flagged the comments above as significant for the trader.  He responded to this trader:

….this is a great observation and a great thing to work on.  The key is shifting the focus in real time:  quality of preparation helps with that, as you point out, and short breaks from trading where you can scan the universe of candidate stocks/trades can help the process.  What I think you’ll find is that, with experience and great prep, those breaks will become shorter and shorter and eventually you’ll be able to shift your focus in real time like that Shark guy you might have heard of…

During the same evening a developing trader wrote on the same need to observe opportunity in real-time, in his review:

I have to be more flexible in terms of understanding there’s nothing that fits my eye prior to the open but at the same time that if a pattern shows up that’s in my Playbook I must put risk to work.

A good best practice is to schedule time during the open and build into habit looking for opportunities that just visit.  It is terrific to game plan.  But you also want to be open-minded for an opportunity that just arrives.

Leave room in your Game Plan for trades to just appear.

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During his daily review, a developing trader from the desk, shared a strategy taught by his Senior Trader to help not take profits too quickly.   This junior trader wrote,

(edited….Big Dawg) also helped me with my issue of taking off everything too quickly after I take profits the first time. During the last big up move that ADSK had up to 137.5 area, once it got to 137 he said just start selling 5 shares every 5 seconds, you’ll feel better about the trade, feel like your taking profits, and still be able to hold onto a good amount of size if it goes higher. That piece of advice really helped me in that scenario in terms of taking off size slower when I think there is more room. I am planning on continuing to employ that strategy in the future to help me better hold things when I really think there is room.

I have used this technique in the past as well with expensive stocks/products.

It is comforting to be selling something and booking some profits.  Yet this technique leaves you in the real position with real size.  It is kinda brilliant.

Try it out.  I hope it helps.

Trade well.

*no relevant positions

March 13, 2018

This week, SMB Options Desk Trader Andrew Falde returns to the Options Tribe to discuss his experiences and research  into trading  CL Futures Options.

Options Tribe meetings are generally free to the public and are held every Tuesday at 4:30PM ET. If you wish to register to this meeting, please click here.

We look forward to seeing you at the meeting!

Seth Freudberg
Director, SMB Options Training Program

The SMB Options Training Program is an eight-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com.

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Risk Disclaimer
Futures Risk Disclaimer

One developing trader at our firm is not viewing his trading future only as a discretionary trader, but as a hybrid trader.  A hybrid trader uses technology to make better trade decisions, and pulls money out of the market as a discretionary trader, discretionary trader armed with tools to make better trade decisions, and with automated models.

Here is that trader’s review after a recent trading session (edited):

Friday was a milestone day for me for a few different reasons. It was a record P/L, first time over ($$$), and a record trade in ZSAN. (Trader N) and I got our first model live, and Friday was the first day the model ran and it yielded a 100% win rate (9 for 9 trades) and made $$$ trading 25 share lots of SPY. I think the thing about Friday that means the most to me is the fact that I visualized both the ZSAN and QQQ trades the evening before and came into the day with a plan that I executed and capitalized on. This was a big step for me in terms of being able to see the opportunities, see them play out, and trade the opportunities. These were two scalable trades in two completely different arenas the can become big-time setups for me in my career. I could have traded them better, and there will be more opportunities to take what I learned Friday and trade these setups better the next time.

There are numerous lessons for new, developing and experienced traders in his write-up:

a) Trader is making better trade decisions as a discretionary trader, with an automated model built with a teammate.

b) Trader is making money as a discretionary trader, a discretionary trader armed with automation to make better trade decisions, and automated models.  This is a more expansive career path than just being a discretionary trader.

c) Trader is showing edge with smaller size in different strategies and then will increase his risk.  He is experiencing small wins, from which he can build.

d) Trader uses visualization to best prepare for the trading session.  This is an excellent best practice that trader ought to replay before more opens.

e) From this success, Trader starts mapping out how he could have traded even better.

Dr. Steenbarger wrote an important post recently about the learning curve of traders.  Above is an example of a trader walking through such a learning curve.  Notice how he is attacking his career from multiple angles to make money.  Notice how Trader is winning at an early stage, well short of 7-figure trader.

The winning that new, developing and experienced traders achieve along the way to their best trader can be seen by this trader above.  Thru the power of compounding improvement, this winning lays a foundation that quietly leads to becoming a large and sustaining trader.

*no relevant positions

Related posts

Visualization guide by Bruce Bower

How fast is the learning curve for traders?

Riding into work today, I reviewed The Daily Report Card of a developing trader with this month’s goal of sizing.  Some might read her trade review and wonder: Is she making too many trade decisions?

Often you hear traders lament they need to hold their winners longer.  Or traders carp they should have given a trade a bigger stop.  As an active trading trading coach, I generally prefer a different approach for consistent trading.

I notice much better odds for active trading success when traders are able to make more decisions and still stay in the real trade.  Traders who can cut trades not as likely to work based on what they are seeing in markets.  Traders who can get out of a trade and then back in, after noticing the trade more likely to work.  Traders with the openmindedness and nimbleness to change their minds quickly about risk on and risk off.

This trader wrote (highlighted most important comments relative to this post),

8/10

goal this month: appropriate sizing

BXC- scratch trade. got started with a super small size to start getting a feel (Trade decision A) for how it traded, didn’t like how wide the spread was and how thin it was so never initiated an actual position and didn’t force a trade here so that was good.

CRIS- same as BXC; started with a tiny size but never saw a good setup (Trade decision B) to actually trade so just got out for scratch; again, good job of not forcing trades

NTNX- lost money but was actually pretty happy about this trade. saw a setup I really liked, saw weakness on the tape and started building a position for short. sized up to tier 3 risk, sized down on the bottom of the channel when there were clear support in the $50.80s (Trade decision C), and got out when my risk was hit.

I think my plan was good, had a clear level that I trusted to risk off of and I followed it.

The execution of my plan was pretty decent for the most part; the only thing I did outside of my plan was I covered part of my position near the top end of the range, just 2 cents below my risk, bc I was a bit scared at that point. recognized it after I got out so I got right back in (Trade decision D)….

Trade decision A- She starts small looking to make another trade decision to get bigger.

Trade decision B- She makes a trade decision not to get bigger, while looking to make another trade decision.

March 20, 2018

This week, Amy Meissner returns to the Options Tribe to discuss a variation of the Asymmetrical Iron Condor strategy which is designed to create quick and steady profits on a consistent basis.

Options Tribe meetings are generally free to the public and are held every Tuesday at 4:30PM ET. If you wish to register to this meeting, please click here.

We look forward to seeing you at the meeting!

Seth Freudberg
Director, SMB Options Training Program

The SMB Options Training Program is an eight-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com.

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Risk Disclaimer
Futures Risk Disclaimer

Mike Bellafiore discusses RKDA and mostly SIG in our 11AM mentoring session today. Mike discusses the “moment in time” when you could have placed an excellent risk/reward trade in SIG. We hope these video reviews from our training room, help you improve as at trader.

* no relevant positions

March 27, 2018

Last year, Options Desk Trader Tim Pierson shared his $SPX Parking Trade with Options Tribe members. This week, Tim returns to the Options Tribe to share his Long Term Parking Trade with Options Tribe members.

Options Tribe meetings are generally free to the public and are held every Tuesday at 4:30PM ET. If you wish to register to this meeting, please click here.

We look forward to seeing you at the meeting!

Seth Freudberg
Director, SMB Options Training Program

The SMB Options Training Program is an eight-month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com.

No relevant positions
Risk Disclaimer
Futures Risk Disclaimer

In 2009, our desk outperformed our peers.  We did so playing intraday momentum mostly in AIG, FAS, FAZ, as their intraday moves were outsized.

We were short when a good risk/reward visited and long when a good risk/reward appeared.  We made a series of Move2Move trades.  In and out and in and out and in and out.  We call this momentum trading.  We might also call this momentum scalping.

As a firm, we moved away from this type of trading as volatility decreased.  We still taught this strategy, but advised to use it selectively.  When volatility is compressed it does not work well on market plays and ETFs, save select days.

The past two trading days have seen outsized moves in markets, stocks, and volatility.  I have noticed some traders feeling pressure to capture the big move.  Let me offer some advice…….that is not necessary in this market.

If you are a big trader and want to play for the big move that is fine.  Especially if you structure your trades cleverly.  But this is not necessary with an elevated VIX.

And I wonder if it might be better for developing and new traders to momentum trade with a Move2Move strategy in this current market environment- elevated VIX.  Hawking products like UVXY, VXX, SPY, IWM, QQQ is strategically sound.

The elevated VIX is what will pay you.  Capturing a series of medium size moves, in and out, really adds up.  And you can capture them on elevated VIX days.  And you remove the pressure of having to capture the big move.

Some traders positioned themselves for the big bounce on Friday.  And then we sold off hard into the close and they missed the opportunity to short.  They had to cut their long losses.  And the market was too low for swing shorts below SPY 262.

But what if you removed that pressure to capture this big move?  What if you recognized the weakness into the close and played the downward momentum with Move2Move trades?  You would have employed a strategy confluent with the market direction and let the elevated VIX work for you.

Let the elevated VIX work for you.  Short overextensions.  Hit breakdowns.  Buy breakouts.  Buy oversold moves.  Exit when the move subsides.  This works in market stocks and products with an elevated VIX.

This market is not exactly like 2009.  But the style of trading employed more selectively to a sector in 2009, will be very effective in this elevated VIX environment and expressed with market products and stocks.

*Now having said all of this, visualizing how to position for a bounce Monday if we gap down, sell off, and then stop going down, and hold higher ought to be part of your preparation this weekend.

*no relevant positions

I received this question from a foreign trader and SMB Training student,

After taking “The Winning Trader” and trading for a year I am now starting to be consistently profitable.

However: My statistics show that I make more money trading VXX and SPY than trading stocks. Is trading futures more like trading the market? Should I maybe try futures instead of stocks?

@MikeBellafiore

Huge congratulations on becoming a Consistently Profitable Trader- CPT as I termed in One Good Trade.

In this video, Mike Bellafiore, runs through a profitable trading strategy used on the desk to trade Dropbox ($DBX) during its IPO today. Dr. Steenbarger also adds feedback on what traders ought to track to trade this IPO best.

* no relevant positions

Our next SMB Webinar is this Thursday (March 29th) after the close. It’s going to be first of its type — a replay of a live futures trading session where you will learn …

• What a typical trading session involves for a professional trader and how you can become better prepared each day.
• How top futures traders use their preparation to make decisions in real time and adapt to changing markets.
• Why transparency and “No BS” is required in our community.
• How to move forward in your futures trading and earn a fully backed SMB Futures trading account.

We look forward to seeing you in the webinar this Thursday.

>>> Click here to learn more and register for this LIVE free webinar <<< 

We’re excited to invite you to register for an SMB Live Online Class next week.

Intro to Probability-Based Trading

The goal of this class is to help you learn How To Leverage Market Data To Assist Your Trading Decisions.

Join us to learn how you can improve your statistical edge by gaining a more complete understanding of probabilities in trading.

Learn more about the class and lock in your Early Registration Discount.

We’re looking forward to seeing you in the Live Online Class next week.

Developing traders often set goals to improve their trading by winning more of the time. That last word (time) is worth a minute of discussion.

There are two ways that the word “time” is often referenced when it comes to winning.

First (and more commonly) it is referenced when talking about win rate. A phrase you’d hear in this case might be “this setup wins 72% of the time“.

Secondly (and my preference) is to talk about actual time — you know, the kind we measure with clocks and calendars. The phrasing used here would sound like “this strategy has won 19 out of the last 21 months”.

If you think this is semantics, please stay with me for another minute.

What if I told you that top traders often only win 40% of their trades but win more than 90% of their months?

Many traders think the best path to improvement is to close more winning trades than losing trades. But that is only one very small part of the story. The rest of the story is measured in key performance metrics such as expectancy, max drawdowns, time in drawdown, and many others.

When you begin to use better metrics to measure your trading, you increase the probabilities of winning more of the time. 

This idea along with many other topics will be covered in the SMB Course: Intro to Probability-Based Trading. 

Learn more and get ready to join us next week for the first Live session.

Andrew Falde
SMB Trader
afalde@smbcap.com

On Wedesday, April 11th, Dr. Brett Steenbarger and I will presenting a free workshop for a Wealth 365 online conference event.

You can register here.

Dr. Steenbarger mentors and coaches traders at our firm.  Often we work in concert with firm traders.  One way that we collaborate, which we will discuss, is a Daily Report Card.  2017 was a year where we outperformed our peers.  And the MVP of trader training methods in 2017 for us was the Daily Report Card.

Each day traders from our firm share a Daily Report Card with Dr. Steenbarger and me, where they work on one goal, intensively, seeking solutions for improvement and grade their performance.  This is a large part of our learning process at our firm, and was envisioned by Dr. Steenbarger.

In talking with Dr. Steenbarger to prepare for our presentation, he encouraged me to talk further about the learning process at SMB.  Key concepts like One Good Trade, The PlayBook (Playbooking trades), SMB Foundation, Team Trading, Trader Development, and automated trader training.  So I will walk through all of that with you so you get a sneak peak inside of the development process of a professional proprietary trader.

Sometimes traders just need exposure to one key trader training concept, that they then employ, to transform their trading. Perhaps, we will share one such idea with you.

Dr. Steenbarger will share his experiences and best practices on the learning process with traders.  He  works with some of the largest firms in the trading universe, and is armed with invaluable best practices and training ideas.

As always, we will save time to answer any of your questions.  And provide contact information for any follow up questions you may have.

We hope you mark this trader learning event on your calendar.

Trade well.

*no relevant positions

Often traders miss a trade and carp, “I should have crushed that.”

Or they make a trade and make too little, mumbling, “I should have made more.”

What happens next separates the elite traders from those not at their potential.

One of our traders left some money on the table with a trade yesterday.  He describes his experience in his review below:

SLS- Biggest winner of the day. pretty much straight down off the open and never took any heat on the trade. Honestly felt that i was not big enough in this trade and was mad that i didn’t get more aggressive on retest of VWAP earlier in the morning. Have been waiting for this setup over the last several Days and should have taken more out of this one.

Notice what the trader has done well.  Trader has made an excellent stock selection.  Trader has traded a setup from their PlayBook with edge.  Trader profited.  Trader gained the experience of executing a trade for which he had edge.  He tasted the trade.  He lived the real-time decisions tick for tick.

And then he did something even better.

Trader specifically points to how and when he could have added size, inside of his trading system, to make more money.  Trader provides a solution to trade better that makes sense to his trading style.  He does this all from a positive experience of a profitable trader, after gaining the experience of the trade.  Trader gains an important rep with this review in making more in this trade so he is more likely to make more going forward.  This is how you make more.

The trader not at their potential expresses regret without the solution for their trading system.  Or they envision a way to trade the setup bigger that is not withing their trading system- mostly meaning not controlling risk/reward.

*no relevant positions

Discretionary traders, systems traders, neutral, mean reversion, momentum, swing, and day traders… ALL of these trading styles and niches rely, to one extent or another, on using probabilities.

• Discretionary traders keep probabilities in mind when making trading decisions.
• Systems traders rely heavily on many aspect of probabilities to create automated or nearly-automated systems.
• Neutral traders need to understand tail risks and volatility.

Doing your homework on market probabilities allows you to either build a better system or focus your discretionary skill on the right market with the right bias.

The goal of Intro to Probability-Based Trading is to give you hard evidence about the setups, styles, and markets you are trading. You’ll be armed with the capability to filter out bad trades, shift your focus to better symbols for your specific skillset, and more.

The first LIVE session is Monday.

Sign Up Here

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