Milk The Cow Status on 16 SEP

The last month has seen an enormous volatility creep into the markets, which has heavily impacted our profits. Our SPY positions have turned negative since inception, while our IWM positions continue to be very profitable.

SPY size: 16 contracts
Launched June 23, 2020
basis $46,005 or $28.75 / share
cash flow $17,895 or $11.18 / share
p&l ($16,305) or ($10.19) / share

IWM size: 35 contracts
Launched June 18, 2020
basis $93,135 or $26.61 / share
cash flow $17,895 or $11.18 / share
p&l $53,778 or $15.36 / share

We always knew that our milk-the-cow strategy is susceptible to losing money during periods of high intra-week volatility. The ensuing whipsawing causes numerous frequent small losses. Also the higher volatility leads to larger spreads between the bid and the ask, adding to the difficulty of rolling trades without a loss.

If you knew in advance when the volatility was going to incur, it would be simple to get to the sidelines, then await calmer times But the market is not always so accommodating. Often it takes a serious of significant whipsaws before you realize the new mood. And by then you may already have lost a lot.

Also, the market does not suddenly announce that it is re-entering a calmer phase. Delaying re-entry into the markets by staying on the sidelines can leave a lot of premiums to go uncollected and reduce the profitability of the strategy.

In this situation, there were 3 approaches we though made sense:

  • Add up cumulative premiums losses during each week and get to the sidelines as soon as a given loss value was exceeded. For example: 70% of options premiums collected. Only get back in once volatility subsides. Subsiding volatility could be measured by bid-ask spreads and 15 minute standard deviatition measurements.
  • roll automatically at market prices (instead of limit orders, which we normally use) on every 1 strike move of the underlying.
  • move out our strikes much further away from the current market price. Since volatility is higher, we would end up still collecting significant premiums.

Additionally, it made sense to consider the negative impact of big overnight gaps, which would preclude us from taking defensive rolls in time, since options are not traded after hours. Here we had a choice of:

  • Getting out every night just before market close. Shorting again first thing in the morning. This sacrifices the nightly theta decay, but protects you from large adverse delta and gamma losses. It also leaves your long term LEAPS susceptible to big changes in value.
  • Or ... short only one side of the trade (puts or calls) based on the opposite of your long term LEAP bias. (If bullish, sell calls and v.v.)
  • Leave the short position on overnight, but establish a next period matching calendar which would offset any big delta or gamma damage while preserving some theta erosion.
  • Establish very skewed short term bets in both directions using proven broken-wing butterfly strategies.

In essence, we tried all of these, but on different instruments (SPY vs IWM vs GE vs BAC) and at different time.

We are still examining our data carefully , and running what if scenarios after the fact using TD America's wonderful historical options pricing tool.

But continued expected market volatility over the next few weeks does not give us the luxury of making long comprehensive studies using large data sets.

The size of our recent losses on SPY requires that we take action immediately, even if based on still scant trial data sets. (And yes, the irony of the parallel to the quandary governments face with coronavirus measures does not escape me...)

The first striking conclusions is how much more we suffered in losses on SPY versus IWM. We lost a cumulative $20,464 for 16 contracts on SPY, or $12.79 per share. This represents 50% of our original allocation! Contrast that with a $5204 loss on 35 contracts on IWM, or $1.48 per share.

This is despite the fact that the two have had comparable volatility.


So why the difference? Well with IWM we pretty much rolled automatically whenever the price made a significant move. But we only rolled when the stock had moved by at last two strike levels, as opposed to 1 strike with SPY.

Consequently, we had 148 rolls on SPY, but only 58 on IWM. Since bid/ask spreads have widened considerably in "whippy" periods, the higher number of trades results in higher losses, instead of the normally slightly superior effect of rolling frequently to minimize delta losses in calmer times.

In fairness, this was not entirely due to the poor choice of directionality. Rather on some days we accepted large losses on our short positions to hedge out a possible loss on our LEAPS. In other words, at times we accepted a loss overnight of $5000 in order to avoid a $15, 000 drop in our LEAP profits overnight. We did not need to do this on IWM, where our position was more delta neutral.

For now, our conclusions are threefold:

  • measure volatility and bid / ask spreads . When these increase, move your strike levels away from center, establishing strangles instead of straddles.
  • close short positions overnight if market volatility at night is very high
  • take steps to neutralize your long term LEAP positions if these skew more than you intended.
  • when your short term positions move against you, roll out in time as well as price, always focusing on bringing in positive premium Roll back in time whenever profits permit it.

I calculate that these periods of high volatility will occur around 3 to 4 times a year for a period of maximum 2 weeks. By taking the measures indicated below, I think we can reduce our losses during those periods to around 10% over the week, as opposed to average gains of 12-13% in remaining periods.

If that can be accomplished, the Mild The Cow strategy should be able to boost earnings from current annualized levels of 37% (15.36-10.19 )/ (28.75+26.61) to over 200%.

As always, there are no guarantees. One can only sweat the details.


SPY – Milking Our Cow Aug 17 – 25

August 17
After having sold our straddle on Aug 16 at 336, SPY gapped up on Monday to 338. We rolled to the same expiry for a strike of 338. This was profitable, losing $0.44/share on the call but gaining $1.08 /share on the puts.

We knew we'd have to close this before end of day, to avoid assignment. This was done at 3:18 pm, netting us an additional $0.05/share on the call and $0.05/share on the put. This may not sound like much, but remember those results are in one day! If we did nothing better than that in one year we'd make over a 100% return.

Normally, I try to sell a new straddle the minute I've closed one. However in this case, I did not do so. I think it was because I was very unsure of the direction of SPY, and feared a big gap up or down.

August 18
In any case, the next day, the 18th, SPY gapped up only slightly. I felt it would close the gap so I waited to sell a straddle when it reached 337 around 11:00 am. By 12:30 the ETF had recovered to 338. I rolled to that level. We lost $0.04 on the call but made $0.02 on the put. It makes sense to take such losses early, to prevent bigger givebacks of premium at expiration. In this instance that was worth about $1.00. We brought in an additional $2.16 in premium.

August 19
Surely enough, the next day, the stock had moved lower. We closed that 339 straddle for a gain of $0.09/share. I probably got a sense of market direction, and decided to only short the calls. This worked out, and I collected $0.56 / share closing the position before the end of the day.

At that point, I thought the market had dropped too much, and a reversal would be in the works. So I decided to short an AUG21 337 in-the-money put, collecting $1.68 in premiums.

August 20
This almost worked against me, as the market gapped down to $335.50 on August 20th. However, I sensed the market had dropped too much for this time frame and a closure of the gap was likely. Had SPY dropped more I would have rolled this position and sold a call at $335. But the gods favored me and SPY recovered. So I was able to buy back my call at a profit of $0.58 by mid-afternoon.

At that point, I though SPY would rally to 338 (it had just breached a wave high at 337.50), but then drop. I decided to sell 338 straddle, expiring AUG21, bringing in $2.28 in new premiums, on options expiring the next day. I texpected SPY to drop.

August 21
Yet SPY rallied. No problem, this strategy is very forgiving. I rolled the 338 calls to 339, at a gain of $1.08. I then sold a 339 straddle, advancing the date by 3 days to the 24th. At 3:40 in the afternoon, it no longer made sense to sell a straddle that would expire in 20 minutes and one side or the other would face exercise. This brought in $2.35 in new premiums.

It's important to put on your short straddles on a Friday, because you benefit by 2 days of free THETA decay. The only exception to this rule is if
you expect a huge economic event over the weekend which could propel markets to big moves. In that case any short positions would lose more in delta than they gained in theta decay.

August 24
On Monday, SPY gapped up by 2 points, not an overwhelming move for a weekend of events. My 339 short straddle was losing money, but I though the gap might close, and waited patiently. By 10:30 it was clear to me that SPY would not close the gap, so I took my lumps, losing $1.08 on the previous straddle. I chose to sell a 342 strike straddle but move date out to the 26th, as I did not want to have to necessarily roll again that same day to avoid exercise. This brought in $2.98 in new premiums.

August 25

SPY opened one point higher at 343.50, and my straddle was barely making any money. I decided to leg out of the 343 straddle to maximize income. I put on a series of about 4 trades, selling one side, then, when the market moved to the other directions - as I intended - selling the other side to maximize premiums. This can obviously also work against you if you read the tea leaves wrong. But I managed it well, adding about $0.20 cents of additional gains. By the end of the day I had rolled two more times, first to 343, than to 344.

So far so good. I've continued to add about $1000 of profits on my 16 contracts. Meanwhile, my long term contracts, are showing an extra $6000 or so of profits for the week.

size: 16 contracts
Launched April 4 2020
basis $48,535 or $28.56 / share
cash flow $17,895 or $11.18 / share
p&l $14,814 or $9.26 /share

GLD – Milking My Rented Cow Day 4

GLD thumbnail 19aug

GLD dropped this morning from 188 to 186.50. I sold a 188/186.50 put spread to accommodate this. The 188 put I bought back resulted in an $0.84 loss and a debit of $2.42 to cash flow, while the 186.50 put sold brought in new cash flow of $1.51.

Somehow - by mistake it is embarassing to admit - I sold a 188 / 186.50 call spread at the same time. I only realized that later, when GLD hit another level that set off an alert for me. Noticing that this was not part of my strategy, I closed the position, even thought it was likely to continue to profit as GLD continues to move down (I think). Since I would have counted this error in trading had it gone against me, I will also count it when it goes in my favor. We made a $0.36 profit on that reversal today. It contributed $0.36 to cash flow as well.

The Lesson? When you are trading with your own money on small positions like this, you don't pay enough attention. Be aware of that. This goes along with my general belief that it's important to put on fewer trades and positions rather than more, and pay a lot more attention.

At midday, GLD had dropped another $2.00. I rolled again, from 186.50 to 184.50. This caused a $1.46 loss on the 186.50 trade. It added $1.74 of new cash flow.

Summing up these trades, my p&l is now

$194 - $84 + $36 -$1.46 - $2.00 (commissions) = ($2)
My cash flow is
$185 + $151 + $36 + $174 = $546

Note: my outer calendar leg expiring AUG 28 has gained in extrinsic value, lessening my losses. Closing everythying out right now would lead to
an overall loss of $79. Still 2 days to go. The tide may yet turn in my favor, especially if I pay attention and avoid fat-finger trading errors.

GLD – Milking My Rented Cow – Day 3

GLD thumbnail 18 August 2020

As the thumbnail image shows, yesterday afternoon GLD rose from 183 to 186. I had prophylactically sold a 186/185 bear put spread if GLD rose to 186, which brought in $0.50 of revenue per share. Now I was holding a -1 +1 -1 "ladder" spread. I did not have time to deal with this until midday, as I was heavily involved in some much larger positions that required my attention.

GLD multiple rolls 17 and 18 August

By the time I did address the GLD position, at around 1pm, GLD was trading around $188.47. Ideally, I would want to be short the 188 strike. So I closed the lower 2 rungs of the ladder, to simplify my positions. I bought back the 187 AUG 21 puts sold at $2.27 for $1.10, sold the 186 puts bought for $1.77 at $0.78. I bought back the 184 put sold at $1.11 for $0.46. Altogether I made $0.63 cents less fees on these rolls.

Finally, I established the new short position by selling the AUG 21 GLD put at 388 for $1.58.

To date I have brought in $194 in realized profits, and have a positive cash flow of $185 after all fees. My original hedge, the 182 AUG 27 put, has lost $187 of value. If I were to close all positions immediately, I would have a gain of around $5.00 after slippage and commissions (194-187 - 2) on an original outlay of $89.00 ($269 - $160). That's a 5% return in 3 days, not too shabby.

But of course I will not sell yet. I still have another 3 days of time to milk my rented cow...

SPY Milking Our Cow on August 13 and 14

On Thursday, SPY started out the day on a moderate drop, so we immediately rolled our 338 straddle into a 335 straddle, at a tiny gain of $28 per straddle, or $0.28 cents per share. During the same day we bought and sold only the threatened call side for a $0.48 gain.

On Friday, SPY did not move much, but we rolled twice during the day to accomodate each $1.00 move. The reason for this is that on the last day of expiration there is a large reduction of theta loss in any strike but the strikes right at the money. So to maximize our option income, it is worth rolling frequently.

As you see below, we've ended the week in great shape, with another day of gains. Our long term leaps could be sold at a $5886 profit, and we've
realized $13,963 of gains. We've had this position on for 17 weeks. This come to a 41% return. Annualized, if this continues at this pace, this would produce $125%. Of course, we'll have to see how things develop.

size: 16 contracts
Launched April 4 2020
basis $48,535 or $28.56 / share
cash flow $15,043 or $9.40 / share
p&l $13,963 or $8.72 /share

IWM rolls 13 and 14 August

As seen in the graph above, IWM remained range bound in the last 2 days, fluctuating around 157. We optimized our positions for maximum theta decay by rolling every time the stock moved by $1.00. This sacrificed a bit of cash flow, but were brought in profits and optimized future profits.

On the 13th we closed off the puts and calls as separate elements, when pivot points were crossed. This was profitable, but is not something I would recommend to my viewers. It can be confusing, and easily lead to errors.

The next three trades were standard rolls. This requires careful attention to the securities price movements, and almost by definition requires the investor or trader to "live" in front of their computer or cell phone. But it adds a lot of additional income over a less frequently traded strategy.

The final and last trade taken today closed out the imminently expiring straddle, and sold a new straddle for the next closest expiry.

Status on August 12
size: 35 contracts Original Launch June 8
Long Term Hedge: $93,159 or $26.61 per share
Cash Flow to Date: $23,018 or $6.57 per share
P&L to date : $53,935 or $15.41 per share

Our long term LEAPS are worth a positive $2750 if closed today. This is a 60% return in 9 weeks time, a phenomenal result. If this continues, we could see a 346% yearly return, which would be simply mind-boggling. Of course, our results may deteriorate, over time, though we are confident they will continue to be quite good.

IWM rolls 05 AUG – 12 AUG

Here was the status at the end of August 5

I got a bit behind in my reporting, so I'm going to provide one graph and a brief recap for each day.

Aug 6
The price opened up $2 over our straddle centered on 152. So I rolled to 154.

bought to close AUG 07 152 call for $1.39 sold at $1.90 for loss of $0.51 per share
bought to close Aug 07 152 put for $0.40 sold at $1.16 for gain of $0.74 per share
overall gain of $0.17 per share

sold to open Aug 07 153 call for credit of $1.16
sold to open AUG 07 153 put for credit of $0.67

Status on Aug 6
size: 35 contracts
Long Term Hedge: $93,159 or $26.61 per share
Cash Flow to Date: $13,323 or $3.80 per share
P&L to date : $47,612 or $13.60 per share

August 7
bought to close AUG 07 153 call for $1.62 sold at $1.39 for loss of $0.23 per share
bought to close Aug 07 153 put for $0.12 sold at $0.67 for gain of $0.55 per share
overall gain of $0.32 per share

sold to open Aug 07 154 call for credit of $2.39
sold to open AUG 07 154 put for credit of $1.86

Status on Aug 7
size: 35 contracts
Long Term Hedge: $93,159 or $26.61 per share
Cash Flow to Date: $21,844 or $6.24 per share
P&L to date : $47,814 or $13.94 per share

August 10

gapped up to 156
bought to close AUG 07 154 call for $4.58 sold at $2.39 for loss of $2.19 per share
bought to close Aug 07 154 put for $0.92 sold at $1.86 for gain of $0.94 per share
overall loss of $1.25 per share

sold to open Aug 07 157 call for credit of $2.50
sold to open AUG 07 157 put for credit of $1.85

size: 35 contracts
Long Term Hedge: $93,159 or $26.61 per share
Cash Flow to Date: $22,195 or $6.34 per share
P&L to date : $43,374 or $12.39 per share

August 11

IWM opened at 157.50, close to where we anticipated it would finish the day, so we had no need to alter our positions.

Status on August 11
size: 35 contracts
Long Term Hedge: $93,159 or $26.61 per share
Cash Flow to Date: $22,195 or $6.34 per share
P&L to date : $43,374 or $12.39 per share

So we finished this period having sacrificed a bit of our rolling premium revenue. However, this has been more than offset by gains to our long term LEAPS which are unexpectedly showing a positive hoviering in the $3400 range. So we might even consider rolling those to lessen the cost of our long term insurance. But that is the subject matter of another post. Their are pros and cons to doing that and I want to address it with careful explanations.

SPY – 12 August Rolls

SPY thumbail 12 August midday

SPY continued to ride the Corona Express roller-coaster today, rising sharply after swooning 7 points in late trading yesterday. Looking
at the technicals, I was convinced SPY would rally to 334, but drop from there to around 332 by the end of the week, and possibly lower to $329.

Late on the 11th I believed the downturn was temporarily done and we were due for a dead-cat bounce up to 334. So I did not yet want to close my 337 deep-in-the-money put, hoping to buy it back cheaper as the price reached 334 again. But as the market was moving fast, I placed a buy order if SPY breached lower lows. That happened after hours, at a price of $4.12, resulting in a loss of $2.63 per share. I normally would have sold a 334 put at that time, to bring in additional premium. Oh well...

This morning, SPY had gapped up to 335, a little higher than I expected. Looking at the charts, I still expected it to hover around $334 for a day or so before dropping lower. So I collect my aug 12 337 calls to 334 bringing in $2.52 in premiums,

Of course, SPY did not care what I thought, and did its own thing. to my surprise, it reached all time highs at $337.47. So I had to roll with the punches, even though I'm still not convinced that we are not seeing a double top formation. I learned years ago to listen to what the market says, and not what I think it should do...

So I again rolled to the now higher centered point at $336. I could have centered at a strike of 337, but again, I felt that the runup was overdone, not being accompanied by any positive news on the political front regarding corona-support measures.

SPY 12 August rolls

When the dust had settled at midday, I had a small loss overall of $511 or $3.19 per share, with a cash flow reduction of $2349 or $1.47 per share.

size: 16 contracts
basis $48,535 or $28.56 / share
cash flow $14,943 or $9.33 / share
p&l $12,318 or $7.69 /share

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