Readers of this blog may have wondered, “Where has Aram been for the nearly past six months?” Perhaps I am being presumptuous and no one noticed at all! Investment “gurus” come and go like the wind, and for many, my absence was likely perceived as an indication that I “blew up” my account with the so called “risky” or “aggressive” trading techniques that I utilize. For those of you that are still reading this post hoping for a juicy story of yet another trader’s demise, I am sorry, but you are going to be disappointed. 2016 has come to an end and I am happy to report that I am happy, healthy, and just bit better off this year thanks to crude oil, gold, and a few other commodities that I like to trade utilizing options! I did not have a banner year like 2015 (+24.99%), but I did manage to eke out a respectable 13.76% return on capital for 2016.
Successful options trading is based on understanding the statistical probabilities and using those probabilities to create an “edge”. The Kelly Criterion is one method that traders use to determine the appropriate position sizing for a given trade. The underlying principle is that you should not put all of your money into a single trade, but rather put in an amount that is appropriate given the probable outcome of the trade and the impact that it may have on the overall account. However, position sizing is not the only use for the Kelly Criterion in trading options.
Readers of this blog know that I endorse very few trading websites or services, most of which were discussed in the blog post, Trading Mentors. One website in particular stands out when it comes to offering comprehensive daily training videos on options trading at an affordable price – OptionAlpha.com. When I began my recent foray back into the world of options trading several years ago, Kirk DuPlessis’ OptionAlpha.com is where I first turned. Kirk has been a great mentor to me and I was quite surprised when he invited me to be on the OptionAlpha.com podcast, currently one of the top-rated investment podcasts. Today the show went live and you can hear the interview by clicking below.
In last week’s Portfolio Analysis I briefly discussed an at-the-money straddle that I sold last week in /ES which proved to be extremely profitable. Today, I opened another /ES straddle, this time placing a protective put since I think this market still has significant downside risk.
— Aram Basmadjian (@abasmadjian) September 7, 2015
Before I discuss this specific trade, I will first provide some background and context.
Over the past six trading sessions, volatility in both equities and crude oil has expanded considerably due to the financial crisis in Greece and, to a lower degree, China. Coupled with the increase in volatility has been substantial moves lower in both equities and oil. On June 29th, the S&P 500 Index ($SPX) opened at 2098.63. Since that day, it has been in a freefall. Today the SPX dropped to 2044.02, its lowest point since mid-March before rebounding strongly at the end of the day to close at 2081.34. Oil has had a similar fate, opening on June 29th at $58.85 per barrel. Today /CL hit $50.58 per barrel before its afternoon rally, closing at $52.95. Although both of these benchmarks had strong closes today, they are still significantly lower than they were several weeks ago. When volatility expands rapidly and an underlying moves sharply against a position, it may be necessary to make a trade adjustment. Adjustments are one of the many tools that should be part of any trader’s toolbox.