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Diary of a WTI options market maker

GL

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I have been a trader since 1980. I started trading options in late 1983. I lost every penny of a $1.6 million portfolio in the crash of October 1987. What doesn't kill you makes you stronger. I have a undergraduate degree in Finance. I have a Masters degree in Economics. I have completed about half the requirements of a PhD in Financial Economics. I don't advise pursuing a PhD unless you want to be a teacher. It will not make you a better investor/trader. I developed a trading strategy involving shorting calls against GUSH in 2015 that I managed for a trucking firm to alleviate the strains of high fuel prices. Early in 2019 the owner of the trucking company sold the company and devoted his time to managing just the strategy itself. He said that he expects to make more profit in 2020 from writing calls against GUSH and writing puts and calls against his WTI contracts than his 32-truck transportation company ever did...all from his home...in his pajamas.

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Dec 17

Closed my Jan options strategy. Net profit was $18,200. Shorted 2 March contracts at $60.44 to go with my already short4 at $57.75 to give an average of 57.98. I am currently long 2 Feb contracts at $49.83 with 2 Feb 58 calls shorted against them at $3.00. My portfolio has gone from a bullish to a neutral and now to a bearish bias. The Feb contracts are maxed out at a value of $58.00 due to the short calls. That's a good thing. As the Feb contract heads to $58.00 the 6 short March contracts do as well. That's $12K in trading profit on the March contracts while not being exposed to risk on the Feb contracts. The target Buy to Close price for the Feb 58 call is 75 cents.

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Dec 18

Gary, 

I've been following you and the Wolf Pack for a few months, very interesting discussions. Qq on your strategy as you close Jan options positions. You mentioned rolling over to 2 short contracts in March here -- in an earlier post, I thought you had mentioned going short 2 March contracts to hedge going long 2 April contracts and selling the usual puts/calls against the April contracts. The March shorts would let you get into April longs even though the current price is well above your standard entry point, $54. From your more recent posts, it looks like you're just going short the March contracts, and not taking any positions in April after closing your Jan positions. Why not use shorts on March contracts to hedge long April positions so you can start to earn on the options? What am I missing? 

 

Edited by marie elena
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I looked over your earlier posts (from Nov 23 on Investing...) and I think it is my mistake -- you were pretty clear that you were shorting 4 March contracts until they hit $54, then would go long 2 March and 2 April. Hypothetical: Say you didn't have the conviction that March contracts would decline over the near term, how would you invest the proceeds from closing the Jan options positions if you wanted to stick to this strategy? Put another way, if you can't enter the trade at $54, would you consider following: Buy April contract at ~$60, sell a $61 call for $2.52, a $54 put for $1.10 (or wait until the price falls and sell then), and go short a March contract to hedge any losses from long April position? If the price rises, you will have losses from the hedge, one possible outcome, and your profit is only from the time decay on the options. But you can get into that game, not have to wait for the price to fall below $54. Or am I missing something critical? Thanks. 

Edited by marie elena
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You're the first trader that has studied my strategy so thouroughly. The other opportunities that you bring up are options I've considered. My primary strategy is to be long the contracts for six months out with each month having 2 contracts each. Since at the time I only had enough capital for 8 contracts my strategy consisted of 2 contracts in the Oct-Jan time frame. When the Oct contracts expired I could've gone short 2 Feb contracts, but thought it was too early. I also could've bought 2 Feb contracts but considered the price too high so I just waited. Eventually the price came down and I went long 2 Feb contracts shorting 2 Feb 54 puts immediately. The price since then has gone on a steady climb and when the Nov contracts expired I decided to short 2 March contracts. The price continued to climb over the next month and when the Dec contracts expired I shorted 2 more March contracts at a higher price. Same thing with the Jan contracts. Now I am short 6 March contracts at an avg of $57.98 along with being long 2 Feb contracts with Feb 58 calls shorted against them. I will do the same with my Feb contracts. When they expire I will short 2 more Mar contracts giving me a total of 8 short contracts. Funamentals will eventually cause a swift reduction in the price of WTI. US GDP for the 4th quarter of 2019 will be less than 2% by my calculations. Refinery input rate is 4% lower than last year indicating a recession is already in process. WTI is already distended from RBOB. I credit this to the enormous amount of speculators in the market. Refiners have continued to slow down due to the elevated price of WTI. Speculators have not. They always lose. If Feb contracts get called away I could buy April contracts and short Apr 58 calls against them, but I would wait to short Apr 54 puts against them to possibly get a better price. I won't do that though. I will short another 2 March contracts. I will be exposed to market risks just like everyone else at that point with a 100% bearish bias.

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Lets hope the market fundamentals follow your market thesis BEFORE the March expiry (since you cannot sell-to-open any options against them)... But this brings to mind "The Market Can Stay Irrational Longer Than You Can Stay Liquid" ~ Also, this "speculator" makes $$$ everyday... I guess I'm in the 10% minority. I wish you the best and is good instruction for an additional strategy in the future (just need that pesky cash for a out-right contract).

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Right. That lack of leverage is a big roadblock. By design and only fair. Everbody voluntarily lines up against the most manipulative, most lucrative market makers in the world. If you make $$$ in oil every day you should start a blog here so your trading can be studied. Scalpers always claim they make more than I do which is perfectly okay by me. It's not an ego thing for me. I made $9,100 per contract on my Jan options strategy. The strategy took 10 weeks  to complete. All trades posted real-time and often weeks in advance. No flying by the seat of my pants. Scalpers think a 20 cent move in a $60 commodity is substantial. For me it's closer to 10%. My strategy is designed to produce significant profits with "minimal" trading and even less attention required. And like you say it's all about that capital requirement. OVX hit a low for the year today about an hour ago. 

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I will give a hint ~ it's called "VSA" but I will not give away my complete edge ~ it has taken 14+ years to get to this point. I even have family members asking "can you show me how?". Maybe when I move down to the Florida Keys/Caribbean I will show them. And yes I see OVX is down close to 23... now @ 26.39. 

 

Edited by OilProspector

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Thanks, so you use crack spreads (and of course, pcpr!) to predict WTI. I was really struck by your (Nov) comment about the value of time in your strategy, when you walked through the exercise of skipping ahead to run the strategy in the December contract as it was then trading @ $54. That started me thinking about how much you're giving up in not selling an April put/call now, and if you could do so even while you short the March contracts. Why do you run 2 contracts for each month? Why not 1 each month, and go out further? More juice in the front month options, and more than 2 is a little too concentrated until you have 12-15 contracts to work with. I am more familiar with equity vol/spx options than oil options, but the premiums are very tempting in the second. Also curious how you came up with 54 puts/58 calls, and what in the data would make you change that interval. (Fwiw, I was surprised you weren't banned earlier from Investing... If I were a market maker, I'd be trying to limit your exposure to retail traders. I hope RRH gets a Slack board set up, just in case Oilprice comes to the same conclusion... Just because I'm paranoid doesn't mean I'm wrong, etc...) 

 

Edited by marie elena

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A lot of questions. First let me say that there is no blueprint for me to go by. You won't learn this in school. I know. I have over 300 hours of college study concentrated in Econ and Finance with Stats and Quantitative Methods thrown in for fun. First question. Why not buy April contracts and short 58 calls against them ? Lets say I did. Instead of going short 2 March contracts at 60.44 I bought 2 April contracts at today's closing price of $60.45 and shorted 2 Apr 58 calls at today's closing price of $4.45. I use a formula for establishing my Buy to Cover of 25% of the premium recieved in this case 4.45. The Buy to Cover price is $1.10. I will collect $3.35 in premiums which get subtracted from the price of 60.45 to deduce a Net Purchase Price of $60.45 - 3.35 or 57.10. If the price of WTI drops below $57.10 then the best strategy would have been to short it. However, the price of the Apr 58 call can get down to $1.10 and have the Buy to Close order to execute without WTI going even below 58. This would allow me to short another Apr 58 call should WTI rallies. I did that with Jan 58 calls. Sold to Open the first round at $3.00 and Bought to Close at 75 cents and then Sold to Open again at $1.25 and collected it all. So instesd of making $3.00 I made $2.25 + 1.25 or 3.50. It doesn't always workout that way. I closed the only round of the Jan 54 puts and made $3.17 out of 4.22. Would have made all 4.22 had I not Bought to Close at the 25% threshold. So lets see how it goes with the April theoretical strategy.

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Why do I go 2 2 2 2 contracts ? The longer the time to expiration increases those premiums. The market maker has all the strike prices with all the months. I only have 58 calls and 54 puts.It's a work in progress. I will eventually get up to 6 months but stay with 54s and 58s. I think WTI will pretty much stay at $56 +/- $5.00. The OVX is really low right now so its not conducive to shorting options. If you check the Open Interest of the Jan 50-54 puts there is probably a big decline. The Jan 54 put I shorted at $4.22 I could have waited and covered at 2 cents. If you reverse the process and buy something at 2 cents and 10 weeks later sell it at $4.22 that would be a homerun.

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15 minutes ago, OilProspector said:

It's teasing me now.

Out @ 3226.00 ~ dick for a tick. Done for the week.

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Just now, OilProspector said:

Out @ 3226.00 ~ dick for a tick. Done for the week.

And there she goes...

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I have no desire to trade like that. You might be relocating to the Caribbean but I'm sailing it. I don't get internet offshore nor do I want it for that reason. My strategy is very low maintaince. Needs to be. You're glued to a screen. Good luck. My system makes $30-40 a day per contract per day. Time is money in options and time in WTI is very expensive. Seven days a week. Not five like yours. I had 8 contracts working last cycle up which we may still be in.  Next lowpoint I will definitely have 9 contracts maybe 10 working. 

Edited by Gary LeBlanc

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The only saving grace is near-record exports. This will change now that ARAMCO has gone public and Russia would like to get its market share back. All bull runs end badly. I'm only 75% complete building my position. I shorted my last 2 March contracts at $60.44. Higher than I anticipated. Think my Feb contracts get rolled over into my short March position higher or lower than 60.40 ? Last year I was early with my shorting but it paid off really well. Fundamentals domestically are much weaker than this time last year and WTI was $50.00

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37 minutes ago, Gary LeBlanc said:

I have no desire to trade like that. You might be relocating to the Caribbean but I'm sailing it. I don't get internet offshore nor do I want it for that reason. My strategy is very low maintaince. Needs to be. You're glued to a screen. Good luck. My system makes $30-40 a day per contract per day. Time is money in options and time in WTI is very expensive. Seven days a week. Not five like yours. I had 8 contracts working last cycle up which we may still be in.  Next lowpoint I will definitely have 9 contracts maybe 10 working. 

I like being glued to the screen ~ 4 to 6 hours a day. Big Deal $$$$ ~ to each their own. I'm still young.

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I'm willing to short 1 car @ 60.45 for long term target of +200t ~ stop limit order placed.

Edited by OilProspector

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2 minutes ago, OilProspector said:

I'm willing to short 1 car @ 60.45 for long term target of +200t ~ stop limit order placed.

If not filled by EOD will look to place Sunday afternoon/evening

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Filled @ 60.45 ~ seat belt on. May close out EOD if in the green and reassess Sunday.

Edited by OilProspector

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Is this a Feb contract that you shorted ? Good luck. I will make about $15K if WTI pulls back to 58.00. I'm expecting much lower though.

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On 12/21/2019 at 2:31 AM, Gary LeBlanc said:

Is this a Feb contract that you shorted ? Good luck. I will make about $15K if WTI pulls back to 58.00. I'm expecting much lower though.

guru, you need to pray ... 24 hours a day ....

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Follow up with my short from 60.45 ~ stopped at +6t ~ had a long signal (12/24) @ 60.58 (60.78 - 20t) but never got filled. Damn. C'est la vie

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