Live: Wednesday, July 31, 2019

10:20 a.m. New York time

Some sell signals on my Robinhood shares account: QAT and WEAT.  That gave me four slots to fill, which I did. Here’s the new line-up, with XLV being a hold-over:

sym slot # price $ sector
FXE 1 105.99 currency-euro
XLV 2 92.21 health care
XBI 3 86.76 biotech
GLD 4 134.86 metals
XOP 5 25.16 energy

The exits:

QAT, out at $17.93, producing a -0.4% (7 cents) loss over 2 days, or a -71% annual rate.

WEAT, out at $5.34, producing a -2.65 (14 cents) loss over 2 days, or a -466% annual rate.

Here’s a write-up on the methodology.

By Tim Bovee, Portland, Oregon, July 31, 2019

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Live: Tuesday, July 30, 2019

3:15 p.m. New York time

I’ve exited two share positions in my Robinhood account, on RSX and XRT, after each gave a sell signal on the Fisher Transform. The buy signals for RSX was given July 25 and for XRT, July 24, although I entered only for the final day of the signals’ durations, 5 days and 6 days, respectively.

RSX fell $0.05 during my one-day holding period and produced a 0.2% loss over one day for a -775% annual rate.

XRT fell by $0.53 in one day, producing a 1.2% loss for a -449% annual rate.

I shall enter two new buy-signal positions on Wednesday.

By Tim Bovee, Portland, Oregon, July 30, 2019

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Live: Monday, July 29, 2019

2:55 p.m. New York time

IBM has pulled back to within the profit zone, barely. The zone’s upper boundary is $150.88. IBM is presently trading at $150.80.

10 a.m. New York time

I’ve entered my first positions on Robinhood under the medium-risk trading method that I developed over the weekend and described in a post on Sunday, “A Robo Advisor Replacement“.

Here’s the lineup:

sym slot # price $ sector
RSX 1 23.66 intl-russia
XLV 2 92.21 health care
XRT 3 43.10 retail
WEAT 4 5.48 commodity-wheat
QAT 5 18.00 intl-qatar

Also, there’s movement in my thought experiment on hedging an earnings announcement in my options trades, which I described on July 17 in a post, “Thought Experiment: An IBM Earnings Play“. The iron condor position, which at entry had a high probability of success, was unprofitable after the earnings announcement, while remaining within the zone of profit at expiration.

Today my paper position IBM moved beyond the profit zone, and under my sudden death rules this close to expiration, will be subject to a mandatory exit if it moves a certain distance beyond the zone.

I calculate the exit point using the Rate of Change metric. If the share price moves far enough beyond the zone that it would take a day, or more, to return to the zone, then that triggers the exit.

In IBM’s case, the metric stands at 0.83, meaning that it would that that portion of a trading day to return to the zone of profitability. So, no exit yet, but it’s close.

By Tim Bovee, Portland, Oregon, July 29, 2019

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A Robo Advisor Replacement

(A version of this post was published as an essay on Medium.)

(This rule set was updated on August 14, 2019 by replacement of the Fisher Transform with the DMI as the trading signal. See the new version here.)

Last week, as I watched with sadness as the return on 13-week Treasury bills decline yet again, I scratched my head and thought, yet again, about where to put funds for a return that would meet my two goals: 1) Beat inflation, and 2) make a reasonable profit. The Federal Open Market Committee has turned to stimulating the economy, lowering interest rates to make that happen, and lowering my return on my T-bill cash reserves.

We who lived through the Great Recession of 2008 are quite familiar with the problem. Interest rates fell rapidly, closing in on zero percent, what the Federal Reserve folk call the ZLB, the Zero Lower Bound. I think of it as something like an absolute zero for central bankers.

We had retirement savings to manage. We couldn’t allow it to be chewed and mangled by inflation, a clear danger in the minds of we who lived through the horror show of the 1970s. But with interest rates bouncing along near zero, we had safe haven to turn to.

It was that realization that convinced me to start trading heavily managed options trading. It proved to be a learning curve, and I took losses. And as I got better at it, options trading proved to be a good way to make higher risk trades.

Of course, it’s usually not very wise to put all funds at high risk. I divide my funds into three groups: High risk (options, which are leveraged), mid-risk (stocks, which aren’t leveraged), and low risk (Treasury bills, whole-life insurance policies with a cash value that can be borrowed against or cashed in). If I owned property, I would add a fourth category, real property, which is low risk, leveraged and somewhat illiquid, with high carrying costs.

One consequence of the lower interest rates environment is that the low-risk Treasury bills become inadequate to my needs. Some of that money needs to go to elsewhere in order to earn a return.

So last week I checked out the Big New Thing of the last couple of years in financial management, the robo advisor. They’re a species of fin-tech that is pitching heavily to adults of the Millennial generation who are flooding into the workforce.

The robo advisors I check out use modern portfolio theory to construct a high diverse mix of stock exchange-traded funds and bond ETFs, both U.S. and global, with the percentages set according to a customer’s age and risk aversion. Some of the funds set it up so that the customer can fully invest, rather than having money left over because of low granularity imposed by a share price. Some also will automatically adjust the holdings to maintain a balance among the various types of holdings in the account. The cost is low. Most that I saw charge 0.25% of holdings annually. Some charge 0.5%, and I saw some that are free. All to the good.

The downside, it turns out, is that none of the robo advisors I checked out won’t allow funding from a brokerage account, only from a checking account. Think of it. An investment platform that won’t allow funding from a brokerage account. It seems senseless to me, an unforced error, perhaps an effect of highly restrictive work rules imposed by the robo advisors union. And since my personal finances rely heavily on brokerages, I sadly turned from robo advisors, convinced that if I wanted a method of  managing funds for greater return but no more than middlin’ risk, I would have to invent  it myself.

Robinhood came to the rescue. Robinhood Markets Inc. is a brokerage founded in 2013 with the goal of easy trading online without trading fees. I underlined the no trading fees part because that change overturns the long-standing preference most private traders have to holding stocks for the long term. In traditional brokerages, each trade into a position produces fees, and each trade out produces fees. Stocks generally aren’t leveraged, and trade in and out enough, the trader will find his exits have been eroded away.

Robinhood, by eliminating trading fees, liberates the trader from the buy-and-hold  restriction, making it possible to follow trading signals closely, even if it turns out to be a buy signal on Wednesday and a sell signal on Thursday. It puts an end to the two ancient laments, “Well, if I had bought Amazon back in the day, I’d be a millionaire today,” and “I know the markets down 10%, but if I just hold on long enough, it’s sure to come back.”

Adherence to trading signals in Robinhood’s first advantage.

By allowing quick trading without a financial penalty, Robinhood also allows for diversification over a period of time rather than static diversification. Exchange traded funds provide diversity in a holding, but under a buy-and-hold scenario the diversification is limited to the holdings of that fund. If I hold fund A for a week (during a buy signal), and then switch it for fund B for three weeks (during a buy signal), and so forth with funds C, D, E and F, then I’ve achieved a higher degree of diversification than a single fund will allow.

Diversification over time is Robinhood’s second advantage.

And so I came up with a plan, and trading rules, for managing stocks by closely adhering to trading signals on exchange-traded funds, providing diversification both statically and over time.

Here, the, are my trading rules for a self-managed alternative to the robo advisors.

Stock Trading Rules: Mid-Risk


The goal of my Robinhood rules is to create a highly diversified managed weekly according to changes in the Fisher Transform technical analysis tool that signals trend changes. A trend change signal is generated with the Fisher Transform crosses its signal line, which is a moving average. (See the appendix, below, for a description of the Fisher Transform.) Any unambiguous trend analysis, such as a moving average or the MACD, could be used in place of the Fisher Transform.


My holdings consist of a portfolio of five exchange-traded funds picked from a pool of funds. For signalling, I use the Fisher Transform applied to a daily chart. If the Fisher Transform is above the signal line, then it is a buy signal. If it is at or below the signal line, it is a sell signal.

I shall begin the method with a pool of nearly 90 exchange traded funds, including U.S. general index funds, sector funds, international global and country-specific funds, and a few futures-oriented funds in metals and agriculture.

Each trading day, I do the following tasks:

Update the pool with new Fisher Transform trend readings (which are binary: Above the signal line or at or below the signal line).

  1. Compare with the final trend signal of the day.
  2. Exit any holdings whose signals have changed from buy to sell.
  3. Bring the holdings count up to five positions by selecting according to these criteria:
    1. The Fisher Transform is showing a buy signal.
    2. The most recent date that the signal for each symbol switched from sell to buy is preferred over earlier signal dates. If the number of symbols on the most recent signal date is insufficient fill out the portfolio, use the next most recent date. For any selection date where there’s a choice of symbols to use, make each selection using a random number.
    3. Each fund in the portfolio represents a unique sector compared to the others.

More briefly, the selection criteria for my five positions:

1) Buy signal. 2) Newest trend. 3) Unique sector.

Appendix: The Fisher Transform

The Fisher Transform, created by John F. Ehlers, converts prices into a Gaussian normal distribution, highlighting when the prices are at an extreme based on their recent range. The goal of the conversion is to spot potential turning points.

An article in Investopedia (“Fisher Transform Indicator“, April 19, 2019) describes the steps in calculating the Fisher Transform: 

  1. Choose a look-back period, such as nine periods. This is how many periods the Fisher Transform is applied to.
  2. Convert the prices of these periods to values to between -1 and +1 and input for X, completing the calculations within the formula’s brackets.
  3. Multiply by the natural log.
  4. Multiply the result by 0.5.
  5. Repeat the calculation as each near period ends, converting the most recent price to a value between -1 and +1 based on the most recent nine-period prices.
  6. Calculated values are added/subtracted from the prior calculated value.

I use a derivative metric, the FTtrend, that I coded using the ThinkOrSwim programming language, ThinkScript. It returns a 1 for a buy signal and a -1 for a sell signal. Here is the code:

declare lower;

plot status = if(reference FisherTransform().FT > reference FisherTransform().FTOneBarBack,1,-1);


And that’s it. I anticipate that updating the fund each trading day will take 5-10 minutes, max.  It seems like time well spent.

I shall list the initial holdings using this method on Monday in my Live post, and update the list whenever the trend signal changes on a position, causing an exit from the old and replacement by the new.

By Tim Bovee, Portland, Oregon, July 28, 2019

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Live: Friday, July 26, 2019

3:10 p.m. New York time

And as expected, my paper-trade short iron condor position on IBM, part of an experiment in hedging short iron fly earnings plays, remains within the profit zone but unprofitable as of now. Under those circumstances, my sudden-death rules say to continue holding the position, exiting immediately if it becomes profitable, without regard to the degree of profitability. If it never becomes profitable, then I exit on the first trading day of expiration week. If the share price moves beyond the profit zone, special rules kick in that are described in my trading rules.

Meanwhile, Monday will be 53 days before the September 20 expiration of the next monthly options. My goal is to around 45 days prior to expiration, we we’ll have a bit of a break from iron condors to work on other things, such as a plan for making best use of the no-trading-fee Robinhood brokerage as a highly managed shares account. Working on it now.

2:45 p.m. New York time 

I’ve posted results for IYR.

2:20 p.m. New York time

I have exited IYR for a $0.36 debit, or 16.3% of maximum potential profit. Results to come.

10 a.m. New York time

Happy Exit Day, everyone!

Today is 21 days before expiration of the August options, and according to my trading rules, I am required to exit all profitable short iron condor positions today.

As it turns out, only one such position remains: IYR. At the opening bell, it was trading at a debit of $0.38; the target exit, 50% of maximum potential profit, is $0.22.

At the opening bell I placed an exit order at $0.22. Each hour I shall raise that order by two or three cents until I get a fill.

My thought experiment position in IBM is showing a loss, so it doesn’t come under the mandatory sale rules. Instead, as long as it stays unprofitable, I keep it alive until the Monday before the options expire and then exit. If it turns profitable, I exit immediately.

By Tim Bovee, Portland, Oregon, July 26, 2019

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Live: Thursday, July 25, 2019

3:40 p.m. New York time

Exited EWZ for a $0.25 debit, or 50% of maximum potential profit. Results to come.

2:25 p.m. New York time

I’ve placed an exit order on my short iron condor position on EWZ, with an ask of $0.25, which is 50% of maximum potential profit.

Friday is 21 days prior to expiration of the August monthly options. Under my trading rules, on that day I’ll exit all profitable positions, no matter how small the profit. I’ll continue to hold the remaining positions, all unprofitable for the moment, under my sudden-death exit rules.

My remaining short iron condor positions, on EWZ and IYR, are both profitable and if they continue to be so, then I shall exit them both on Friday.

The hypothetical trade on IBM that I worked up as part of a thought experiment is presently loss-making. I’ll continue to track it under the sudden-death rules.

By Tim Bovee, Portland, Oregon, July 25, 2019

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Live: Monday, July 22, 2019

11:25 a.m. New York time

I’ve placed an exit order on my short iron condor position on KRE, bidding a debit of $0.18, a bit above 50% of maximum potential profit.

10:35 a.m. New York time

XBI results posted.

9:45 a.m. New York time

I have exited XBI for a $0.35 debit, close to 50% of maximum potential profit. Results to come.

By Tim Bovee, Portland, Oregon, July 19, 2019

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Live: Friday, July 19, 2019

4:30 p.m. New York time

No fills.

9:40 a.m. New York time

I’ve placed exit orders on KRE and XBI at about 50% of maximum potential profit.

The next options expiry I’ll be trading are the September 20th monthlys. They are 63 days out from expiration, and my goal is to enter with 45 days remaining, on or near to August 6.

By Tim Bovee, Portland, Oregon, July 19, 2019

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IBM Analysis

International Business Machines Corp. (IBM)

Note: This trade was based on a hypothetical study aimed at allowing hedged trading of earnings announcements. To ensure I had an accurate fill price, I converted the hypothetical high-risk portion of the hedge to an actual trade, which I placed on Wednesday.

Update 7/18/2019As my experimental rules require, I have exited my short iron fly earnings play on IBM. As the closing bell approaches, it is trading beyond its zone of profitability. The implied volatility rank declined by 11 points to 42%.

IBM published earnings on July 17, swung wildly in the overnight trading, and then, after opening within the profit zone, swiftly rose to above the zone. The way I structured the trade, my maximum loss was $81 per contract. I got out for a $3.92 debit, producing a $79 loss per contract, $2 below the max. Shares at the exit were trading at $149.34, up $6.82 from their entry level.

Shares rose by 4.8% over one day, or a +1,747% annual rate. The options position produced a -20.2% loss for a -7,356% annual rate.

Update 7/18/2019IBM published earnings after the closing bell on July 17, beating the street estimate by 9.2 cents for a quarterly result of $3.17 per share. The market had closed pre-earnings at $143, the short strike price of my iron fly. After the earnings announcement, the price almost instantly rose in after-hours trading to $149, quickly fell to $140.34, and then bounced, settling between $141 and $142. After the opening bell the price rose sharply again and as of 9:55 a.m. New York time was trading at $147.53, a dollar above the profit zone. The implied volatility rank stands more than three points of where it was before earnings.

As set out in the hypothetical study, the idea was for this high-risk trade to be paired with a low-risk trade expiring on August 16. The low-risk position, described in the hypothetical study, has a profit range running from $150.88 to $120.88 and had I made such a trade, would remain profitable with quite a large margin to spare.

On July 17 I entered a short iron fly spread on IBM, using options that trade for the last time two days hence, on July 19. The premium is a $3.13 credit and the stock at the time of entry was priced at $142.52.

The profit zone for this position is between $146.13 on the upside and $142.13 on the downside.

The implied volatility rank (IVR) stands at 53.

IBM publishes earnings after the closing bell the day of entry into the position.

Premium: $3.13 Expire OTM
IBM-iron fly Strike Odds Delta
Long 147.00 69.1% 33
Break-even 146.13 59.6% 42.8
Short 143.00 50.0% 52.6
Short 143.00 50.0% 47.4
Break-even 142.13 59.0% 38.7
Long 139.00 67.9% 30

The premium is 78.3% of the width of the position’s wings.

The risk/reward ratio is 0.3:1, with a maximum risk of $81 per contract and a maximum reward of $313 per contract.

By Tim Bovee, Portland, Oregon, July 17, 2019

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