Real P&L February 2020

This is Karl with your Real P&L update for February 2020.  I have delayed putting this video out because I’ve been working on tweaking and back-testing my updated trade plan.

When I open a position one of three things happen.  #1 I’m in a bull-market, or sideways market, and I hit profit target and I exit.  #2  I’m in a grind-down market and typically I’ll roll the position.  And #3 it could be a crash market.  

So in the first situation, with the bull-market or sideways market, again, I hit profit target then I exit.  If I’m in the grind-down, I roll my positions down.  The position has negative charm.  That’s a second-order Greek which means that the more mature the trade is the better chance I have for profit if the market moves down,  So when I grind down, or a slow move down, it provides an opportunity to reestablish a position at a lower level.  Which means more room for the market to go down.  So when the trade is open, it can handle the SPX down to a certain level like a trigger level and then what happens is I can roll the position.

Let me give you an example of how I did this in the grind down.  So here’s an example of how my system works in a grind-down market which happened in late 2018.  You can see in this period here.  So what happened was I might have established a position right in here somewhere and you can see that if the market goes down and down and down and down that’s not good because again I’ll hit my trigger point.  So I might hit my trigger point somewhere in here and then I want to reestablish.  So what happened was I probably hit my trigger point probably around somewhere in here and then this day came up a little bit this day came up a little bit.  I probably reestablished or reopened a new position for break even and then I had a new trigger point down here.  So that’s what happened and then what happens is I can keep reestablishing my new trigger point until I get one update.  That’s all I need is one good update.  So at this point when I had this up day right here, just this one day, I was able to break even for this whole downturn and a grind down that’s how my trade plan would operate.

Now let’s talk about a crash market.  In a crash market what happens is I’ll have a hedge.  This is a put credit spread. This is an example of a hedge to put credit spread in a crash market.  So you can see as we go back through this, that I’ve kind of explained this before in prior videos, that this is a breakeven line here and you can see the profit and then the loss.  This is your price of SPX it is what I trade and this is what a put credit spread looks like.  And then this is what a hedge put credit spread looks like on August 24th.  This is a crash market so when you get a crash, you can get this exponential return if you hedge properly.  

So this is the type of hedging that I currently have with my portfolio, so I get into a crash market this is what happens.  For example, in this market right here, August 24th.  This particular market, this August 24th right here, when this day happened the crash paid off.  The hedges activated.  The reason I’m going over this is to kind of compare it to what’s going on in today’s market.  But the crash did activate here on the actual day of the crash which is interesting and then there was another crash on February 5th, 2018, right here.

Now what happened was the activation of the hedges actually delayed for a day.  They didn’t actually activate on the day of the crash.  They activated on February 6th the next day.  So you can see that we’re starting to get this a little bit of a delay of a response for the activation of hedges in my trade plan.  Now, this particular crash which is what we’re currently in–the current environment.  We started crashing down into here and all the way down into here.  So basically I would call this day, right here or even back in here, a crash scenario from here to here.  So you would think well maybe the hedges will activate here the next day or two, but what’s interesting is that hedges didn’t even activate until all the way until this day right here. 

So the crash occurred here and it took about a week and a half for the hedges to activate.  So what we’re seeing is the activation of hedges–let the example that I showed you that put credit spread–is actually kind of delaying over the last three crashes.  First it was that it happened on the day of the crash, then it happened the day after the crash, now it took about a week, week and a half, for the activation to occur.  

So that’s a little bit different and it did cause me to do a couple things differently.  Another note about a crash market.  This is the current environment that we are in and I do talk about this crash type market in Chapter 11 of my book.  Where I go over diversification and how there are points in time when diversification just flat-out does not work.  And for example right now even gold is down sharply and I call this type of market crash correlation.  Which means that all assets are correlated because when you want to diversify you try to pick assets that are not correlated.  But in the crash correlation, which is where we are now, everything’s correlated.

Next I’m going to go into what actually happened in my account with my trade system.  So what happened with my trade plan on Thursday, February 27th?  This was a couple days into the crash.  The hedges did not kick in and at the end of the day, on Thursday, at the SPX price lowered to a point all the way to my trigger point where I needed to exit.  But I decided to hold my position hoping for an update on Friday the 28th.  At the time, my account was down around 12% and all my back-tests for 2008 to 2020 only showed the most drawdown ever of 6%.  I was down 12% so I was holding on hoping for an update on the next day on Friday the 28th.  But that day on Friday the market opened even lower and it was just basically a very tough situation for me and I had to close out because I couldn’t take any more losses.  So I had to close my position out for a much larger loss than what I should have.  So let me show you what my account ended up at at the end of February.

So as you can see I took a significant drawdown, over 30%, and that was because of the combination of a couple things.  Like I said before the hedges didn’t kick in like they normally would at that point and then also I should have exited on that Thursday when I hit my trigger point but I did not; waited until Friday.  But now I have since back-tested through this crash period and I talked about the difference in the crash markets between when hedges activate and I’ve made two key changes to my trade plan.  

#1,  I’ve neutralized deltas on my positions because I did have positive deltas.  Which means that I was long the market but I also had hedges that were supposed to cover me if the market did crash.  So being long and also having the hinges, again back-tested from 2008 to 2020 it was fine, but with this particular crash because of the delayed hedges activation caused this.  I have made two key changes to my trade plan.  #1, I’ve neutralized my delta’s because I was long deltas or positive delta’s are long the market in my prior trade plan.  Because typically the hedges would kick in and saved me in this type of market which they did not in this particular instance.  So having neutralized delta’s is going to be a significant improvement in planning out for this type of a market and also be fine and all the other markets. 

And also I have spread my risk by implementing a scaling approach.  Before I was using an opportunistic approach and allocating 100% of my planned capital per trade.  And that’s because all my back-tests from 2008 to 2020 showed excellent results with the 100% allocation method.  But I am really actually happy that this happened, because the changes I’ve made in my trade plan have diversified my account.  Which not only lowers risk but also has lowered my margin requirements.  

So I’ll be back next month so remember if you want a credible mentor get their P&L.


A Portfolio for all Markets

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