ARKK status 22 July

ARKK has rebounded well today, moving past recent highs. This does not change my prognosis.
I see the ETF moving all the way up to $123 over the next 2 to 3 days. Then I still expect a drop.

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That said, it may never end up in the $85-110 range that would be optimal for our calendar by Aug 6. Since I've got around $21 at risk in each of my 80 positions, that would not be horrible.
But still, why not bring down that risk even more?

Since I'm reasonably sure the stock will move opposite my wishes for the next few days, I'll bring in premium by selling some put spreads. I'll sell the 115/114 puts expiring on July 23, using a limit order. I think I can get filled at $0.10 to $0.14 cents which will bring in $10-14 for each position.

This increases my risk of loss to $86 ($100 spread minus premium collected) instead of my original $21 of max risk. Still the market has revealed its hand, and I will choose to play it. I think the spreads will expire worthless and I'll have reduced my overall costs to $11.

ARKK Reinforcing Our Analysis

Checking on our Featured Trade, ARKK gapped lower today, which was expected by our technical analysis.

click to enlarge

After gapping down to $113, our calendar spread is mildly profitable. But it's not worth the trading fees to close it. I expect ARKK to temporarily bounce up to test recent highs around $118, then resume its trend down.

What makes me think that is the original prognosis, calling for a mirrored move down to $110-111 levels. But confirming that is an examination of the bearish convergence still appearing on the lower lows made by recent price and RSI waves.

We'll see if time proves us right.

Disclosure: Options investing is inherently risky. This is not a solicitation to buy or sell. Please read our options disclaimer on this site before trying to emulate any trade shown here.

Announcing official roll out of Bronze Subscription For Milk The Cow

Since we published our original article on our Milk The Cow strategy about a year ago on Seeking Alpha, we've had a lot of users wanting to subscribe to the Bronze membership ($100 / a month) for the signals service.

We were having a lot issues getting our website membership functionality implemented. This was due to a glitch that took us a loooonnnng time to identify, but which prevented Stripe merchant credit card signals from being sent to and from Stripe. (For curious programmers, it was not the Stripe or the membership API, but rather a faulty compatibility between the latest version of WordPress and the WordPress theme we've been using for the last 6 years. )

Since we were involved in many other activities centered around a new Jolts marketplace, we preferred to wait until this was resolved before accepting memberships in the Bronze service.

That Service is now ready to accept memberships. We'll be contacting those of you who've shown an interest. We thank you for your patience!

You'll also be happy to know that we finished the first year of actual trading at a decent profit (around 17%). This was less than we'd hoped for, but the issues we identified with our approach last September - October have since been tweaked and the algo - we believe - significantly improved. We think this tweaked approach deals better with periods of high volatility. That's good, cause we think a big storm is on the horizon over the next two years that could carry stocks down 60% to 80%. Meanwhile, bonds are paying a negative return.

Please post any questions you may have in the Forums Milk the Cow topic section so that others may benefit from our responses.

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...

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