More on ETF vol drag, via tastytrade

I’ve written before on the topic of vol drag; mainly why I like to take advantage of the concept in a long-term trading strategy.  In summary, volatility drag provides a nice tail wind for going short the leveraged ETF (the risk of the underlying can be hedged away using the unleveraged ETF, as well).

It seems that this concept is one of the more popular posts on my blog.  I’m not exactly sure why, but hopefully it’s from people who either stop using levered ETF longs to achieve portfolio diversification (e.g. using a long 2x/3x S&P ETF for long-term equity exposure), or from folks looking to use shorting strategies (e.g. long puts, short call spreads, short stock) to capitalise on vol drag itself.  I like to combine these two: for example, I’ll get most of my US Treasury exposure through writing synthetic covered puts on TBT.  That way I pocket vol drag on top of Treasury yields.

Tastytrade has done a segment on vol drag recently; it’s a pretty good overview of why vol drag exists, and how to take advantage.  If you like to have someone explain the item,  I recommend.  It was somewhat refreshing to see them use a short-VXX strategy as an example – the first time I’ve seen them softly advocate being short VIX.  The fact is, being short VIX is usually a winning strategy – indeed, this is just a purer form of writing option strangles on the S&P.  Just remember to cover your backside in case Oct 2014 happens again…

Great new resource for those interested in trading options

I’ve already waxed lyrical about the guys at tastytrade.  The group provides a lot of interesting research and fun (online) TV for traders of all types.

One of the more fun, and quality, bits of the show is ‘Where Do I Start’.  The series takes host-man Tom’s daughter, Case, and teaches her to trade options from the very beginning.  She has a small account, so they keep with small trades.  Anyway, they’ve recently cut out the ‘fat’ of the episodes, to leave 3-minutes of good material for each topic.  Worth study, if anyone is keen to learn options basics.

In praise of tasty trade

How do I spend my day, while looking at screens of charts and computer code?

Well, from around 1pm London time I’m watching tastytrade.  Most of my trading is with equity and futures options; these guys spend all day talking researching and trading the same stuff.  The banter between Tom and Tony keeps a smile on my face while banging my head against the wall due to programming frustration.

Tom Sosnoff is the host; he made his $$ creating (IMO) the best options-trading platform there is: thinkorswim.  Now he and his old trading buddy, Tony Batista, chat and present some great content in concert with an excellent supporting cast.  Their new project is an option-trading platform for the millennial generation: dough.

I can’t decide which I like better: the show when markets are down, or when they’re up.  Tom seems to be a perma-bear, so this slow grind higher in basically every world stock market kills his mojo.  The show definitely has a different tone depending on market direction.

In any case, the show really helps stave off loneliness and gives some great ideas.  They have a whole different approach to personal finance.  I think the key aspects of the tastytrade ethos are:

  1. Use options-based strategies, to enhance probability of profit in a trade (e.g. buying a stock has a ~50% chance of profit, whereas going long a stock through options strategies can have a chance of profit just about anywhere you’d like).
  2. Trade small.  Never let a position ‘own’ you, such that you must do one thing or another for a particular trade.
  3. Trade often.  If you agree with number 1, choose high-probability trades.  Then trade many times, such that the law of large numbers comes into effect.  Then your expected probability usually comes out as good or better than expected.
  4. Don’t fear unlimited loss.  If you agree with the previous 1-3, understand that options trades with unlimited loss potential (e.g. writing puts/calls) often offer better risk/reward than limited loss equivalents (e.g. spreads).  The spectre of the GFC makes this a hard one for the missus and me, but maybe one day I’ll stop buying insurance against my option writes…
  5. Manage winners.  Again, from the previous points.  It turns out (from research) that options strategies tend to make 0-50% of maximum profit in a fairly predictable and timely way, but the remaining 50% of maximum profit takes nerves of steel while holding positions to expiration.  Forget the nerves, and close out winning trades at 50% of maximum profit.
  6. Duration over direction.  Both in trade initiation and in managing losers, use positive theta to your advantage.  Be paid for the passage of time (i.e. write premium in aggregate).  If a trade goes against you, and you still believe in the trade, keep rolling the trade into the future until your ‘basis’ eventually catches up.  Winning trades seem to last 1-20 days in tastytrade land; losing trades can last months and months.

Anyway, glad to have them around for the banter.