VanEck Vectors Gold Miners ETF  (GDX)

Update 11/21/2019: I’ve exited my short iron condor position on GDX for a $0.29 debit, producing a $0.31 profit on the options, with shares trading at $27.14, up $0.25 from their entry level.

GDX traded within a narrow range during the lifespan of the position. I exited at 51.7% of maximum potential profit, with the implied volatility range at 18.4%, down 25.6 points from its level at entry.

Shares rose by 0.9% over 16 days, or a +21% annual rate. The options position produced a 106.9% return for a +2,439% annual rate.

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I have entered a short iron condor spread on GDX, using options that trade for the last time 45 days hence, on December 20. The premium is a $0.45 credit and the stock at the time of entry was priced at $26.89.

The profit zone for this position is between $29.60 on the upside and $23.60 on the downside.

The implied volatility rank (IVR) stands at 44.0.

Premium:	$0.60	Expire OTM
GDX-iron condor	Strike	Odds	Delta
Long	33.00	96.0%	6
Break-even	29.60	86.5%	16
Short	29.00	77.0%	26
Puts
Short	25.00	79.0%	20
Break-even	23.60	87.0%	12.5
Long	23.00	95.0%	5

The premium is 20.0% of the width of the position’s wings.

The profit zone covers a 9.4% move to the upside and a 14.6% move to the downside of the entry price, for total coverage of 24.0%

The risk/reward ratio is 4:1, with maximum risk of $240 and maximum reward of $60 per contract.

By Tim Bovee, Portland, Oregon, November 5, 2019

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2:10 p.m. New York time

And that is a wrap for the day, insofar as options are concerned. I’ve opened five positions: GDX, TLT, XLU, XLY and XOP, covering gold, long-term federal bonds, utilities, consumer discretionary and fossil fuels, respectively. I’ve passed on SLV for the present. It topped the implied volatility rank chart of my prospects yesterday, but then dropped to 4th place today. If it goes higher again I may enter, although, like love and marriage or a horse and carriage, silver and gold seem to be forever entwined. SLV adds little diversification to my holdings.

2:05 p.m. New York time

I’ve entered a short iron condor order on XLU and posted the analysis.

1:55 p.m. New York time

My short iron condor order on TLT as been filled and I’ve posted the analysis.

1:45 p.m. New York time

I’ve gotten a fill on my XLY short iron condor and posted the analysis.

1:20 p.m. New York time

I’ve entered a short iron condor position on XOP.

12:05 p.m. New York time

I’ve placed a short iron condor order on XLY, +c128 -c125 -p119 +p113, asking for a $1.56 credit. No fill yet.

11:45 a.m. New York time

I’ve placed a short iron condor order on TLT, +c145 -c140 -p134 +p129, asking for a credit of $1.66. No fill as of yet.

11:05 a.m. New York time

I’ve entered a short iron condor position on GDX.

10:35 a.m. New York time

This is the day I enter new options positions, expiring December 20 and constructed as short iron condors. My initial plan is to enter positions on GDX, SLV, TLT, XOP and XLY.

The my momentum screen of yesterday’s results knocked two positions off of the momentum list: FRO and NTRA. They join RNG and SBLK in having an exit signal based on the Fisher Transform (FT) using the monthly chart. All four presently  are in the FT bull mode.

By Tim Bovee, Portland, Oregon, November 5, 2019

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9:25 a.m. New York time

Things  begin to get interesting this week after the customary doldrums between options series. I exited all of my positions in the November monthlies 21 days before expiration, and on Tuesday I shall enter the December monthlies, 45 days before they expire on December 20.

At this point I’m fighting a huge compulsion to start singing “Circle of Life” from The Lion King, the film I watched on my flight home from Japan last week. (Great film — I fell asleep in the middle and logged three full hours.)

It’s the circle of life
And it moves us all
Through despair and hope
Through faith and love
‘Til we find our place
On the path unwinding
In the circle
The circle of life

What better description of the life of an options trader? We’re tightly bound to the options cycles.

We are circling through a time of low implied volatility, and so my choices for the next cycle’s short iron condor options plays are limited: SLV at the top of the list, followed by the gold series (GDX, GDXJ or GLD), long-term federal bonds (TLT), consumer discretionary (XLY) and energy (XOP or USO). Other prospects have an implied volatility rank (IVR) under 25%, to low for an attractive trade using the iron condor strategy. So, five positions, if I treat silver differently from gold.

Slim pickins, but so it goes.

In the meantime, I’ve spent the idle hours working on momentum shares portfolio, perfecting the rules, which can be seen here in the section headlined, “Mid-risk: Momentum Trades of Shares”. Entry relies on a modification of the Zacks Momentum screening. The exit rules, as always, have been the most challenging. At present I’m relying on the Fisher Transform on a monthly chart.

My present holdings: ANIK, BDSI, CROX, EURN, FRO, NTRA, RNG, SBLK, SSD and STRL.

By Tim Bovee, Portland, Oregon, November 4, 2019

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3:10 p.m. New York time

I’ve updated XBI Analysis with results.

6:45 a.m. New York time

I’ve exited my last position of the November options cycle, XBI, for $0.87, or 13.9% of maximum potential profit. Today is management day, 21 days prior to expiration, when I sell all winning positions. There are no losing positions this cycle, so my options trading is done until the time comes to enter the December options positions, on Nov. 5.

I’m still in Japan and shall wait until morning, my local time, and after the close U.S. time, to post full results on XBI.

By Tim Bovee, Fukuoka, Japan, October 25, 2019

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8 p.m. New York time

I’ve updated TLT Analysis with results.

Friday is 21 days before the options in my one remaining iron condor position, XBI, expire. If it’s profitable on Friday, I’ll exit. If it’s not profitable, the position will go into the sudden death phase under my trading rules.

7:20 p.m. New York time

My short iron condor position on TLT has been filled for half of maximum potential profit — a $0.41 debit. Results to come shortly.

By Tim Bovee, Fukuoka, Japan, October 23, 2019

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9 p.m. New York time

An interesting week, exiting options positions and buying stock positions while sound asleep during my Japan trip. It’s my first experience in automating everything in my trading operation, and it has gone well.

The first need to wake up and intervene will come on October 25, next Friday, when I will exit any remaining profitable options positions, 21 days prior to expiration.

The two remaining short iron condor positions are both profitable, TLT at 23.2% of maximum potential profit and XBI at 29.7% of max.

Meanwhile, I’ve spent time working up a ruleset for momentum plays on shares. Here’s a description below, and it has also been posted on the Trading Rules tab at the top of each page of Private Trader.

Momentum Trades of Shares

This strategy relies on momentum for the selection of stocks and on a 20% trailing stop/loss for the exit signal.

Select high momentum symbols based on the criteria of your choice. I discuss my criteria in the “In Practice” section below.

In selecting trades, give preference to

1. Higher rates of change.
2. Expansionary periods while avoiding recessionary periods, as signaled by the Sahm Rule Recession Indicator, published on the Federal Reserve’s FRED tool.

Upon buying the stock, set a trailing stop/loss for 20% below the fill price.

Exit the position when the momentum conditions that prompted the trade no longer apply.

Funds from closed positions will be placed in a government or corporate bond fund, such as TLT or HYG, until required for a new stock position.

In practice

There are many ways to define momentum. The Han et al. study referenced below took a universe of stocks and defined those with the highest six-month change as being suitable for momentum trading.

I have chosen to use the Zacks screen for momentum called Zacks #1 Rank Uptrends, which has the following parameters:

• A Zacks Rank of 1, meaning the strongest buy recommendation.
• A 10% price change over the past 12 weeks.
• A 5% price change over the past 4 weeks.
• A positive price change over the past week.
• A positive price change since the beginning of the year.
• A price of 70% or higher of the 52-week high-low range.

The Zacks query also includes a couple of house-keeping items: A minimum price of $5 and average volume of at least 100,000.

I’ve retained those but lowered the minimum average volume to 10,000 and the minimum price to $1.

The so far has produced results ranging from about a dozen symbols to around 20.

My exit signal is the disappearance of a symbol from the screen results, suggesting that the stock is no longer showing sufficient momentum to retain.

Rather than trying to rank the results of the screen from best trade down to least best, I’ve chosen to use a random number to select the trade. The positions are on the small side, taking advantage of the new commission-free rule of my brokerage in order to achieve equity diversification. I add one trade a week, selecting the trade day by random number, in order to achieve time diversity.

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Three research papers were used in constructing the ruleset:

Han, Yufeng and Zhou, Guofu and Zhu, Yingzi, Taming Momentum Crashes: A Simple Stop-Loss Strategy (September 24, 2016). Available at SSRN: https://ssrn.com/abstract=2407199 or http://dx.doi.org/10.2139/ssrn.2407199

Yusupov, Garib and Shorrason, Bergsveinn, Performance of Stop-Loss Rules vs. Buy-and-Hold Strategy (2009). Available at Lund University: https://www.lunduniversity.lu.se/lup/publication/1474565

Kaminski, Kathryn and Lo, Andrew W., When Do Stop-Loss Rules Stop Losses? (January 3, 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=968338 or http://dx.doi.org/10.2139/ssrn.968338

By Tim Bovee, Fukuoka, Japan, October 18, 2019

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5:55 p.m. New York time

I’ve exited my position on XOP for half of maximum potential profit and have updated the analysis with results.

By Tim Bovee, Fukuoka, Japan, October 17, 2019

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10:55 p.m. New York time

An exit order on my GDX short iron condor, placed at about half of maximum potential profit, was filled during today’s session. The results can be seen here.

By Tim Bovee, Fukuoka, Japan, October 16, 2019

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5:55 p.m. New York time

I’ve posted the XLY results.

5:45 p.m. New York time

I’ve posted the IWM results.

5:25 p.m. New York time 

I exited two short iron condor options positions today, IWM and XLY, each at 50% of maximum potential profit. I shall post results shortly.

By Tim Bovee, Fukuoka, Japan, October 15, 2019 (October 16 JST)

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6:25 p.m. New York time

My options positions remained in the sweet spot, on Thursday gradually accumulating profit as they march toward expiration.

A recent discussion on TastyTrade — my go-to spot for deep analysis of the art of constructing an options position — delved into the question of how to position the wings of a short iron condor, my preferred structure in trading.

My trading rules say:

Short leg entry goal: delta 16 to 24, adjusted for greater risk (the high deltas) balanced against greater reward (the lower deltas)

But they’re silent on where to place the long legs — the wings that every iron condor relies upon to limit potential loss.

And where to place the wings was the topic of the two-party discussion, “Iron Condor Wing Efficiency”. The videos can be found here: Part 1 and Part 2.

Those who follow my trades have perhaps noted that I tend to set the wings at as close to 6 delta as I can get. “Delta” measures the degree by which an option’s price changes relative to change in the price of the underlying shares. At a delta of 6% (0.06), a $1 change in the share price produces a 6 cent change in the options price.

The long wings of an iron condor have a different impact that do the short wings.

The short wings, which by my rules are generally around 20 delta, tell me by implication the probability of profit — how likely is this position to be a winner and how large the premium — the prize — will be. The higher the delta, the lower the probability of winning but the larger the prize will be. It’s a classic risk-reward relationship, where the higher the risk (lower delta), the greater the reward (premium).

The long wings limit our risk. Each is an insurance policy against loss. The lower the delta, the lower the cost of the insurance, but also the lower amount the “policy” will pay out in the event of a losing trade.

So when I choose the strike prices of the short and long wings, I’m choosing how large a prize I want to compete for, how much uncertainty I’m willing to tolerate, and how big a penalty I’m willing to may if I’m wrong.

Fundamentally, when I set the wings of a short iron condor, I’m referring a battle between greed and certainty.

A fascinating subject at the core of what we do as traders, and none dig into it — backed by research — than the TastyTrade crew. So I highly recommend these two episodes.

One specific point they mention is the goal of setting the wings so that the premium is a third of the wing width. In my six positions having November expirations, the premium coverage ranges from 15.4% to 20.8%, quite a distance from the one-third goal. This tells me that my setup is conservative, lowering the size of the prize for greater certainty of winning. In the battle between greed and certainty, certainty is coming out on top.

When the time comes, on Nov. 5, to enter the options positions expiring in December, I shall experiment with ways of increasing the premium coverage without giving away too much certainty.

By Tim Bovee, Fukuoka, Japan, October 9, 2019

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