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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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Gary have you consider the effect of QE 4 that’s in progress now for past 4 weeks and may continue for weeks more ? Seems like CL just melt up together with the wider market Fed continue to inject free $$

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I look at EIA data to formulate my bias. I was long 8 contracts and short zero a few months ago. Now I am short 6 March at avg of $57.98 and long only 2 Feb contracts with Feb 58 calls written against them at $3.00. I do not include QE into my strategy. I will roll out of the Feb contracts at expiration into 2 March contracts to give me a total of 8 contract shorts. Do you include QE when trading WTI ?

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At this period I do consider QE because if you consider the next GDP which you said was the reason for your short bias I don’t understand why you do not consider QE  . Of course time line or time period is a huge factor here . One can argue economy is no good so we got QE so logically one should short especially with your time line which last weeks and months . But ideally one should wait until QE juice runs out to short higher 

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There is a lot more data provided by EIA than a "draw" or a "build" in crude. I will never ever include QE into my calculations. Show me how that has been a predictor of crude prices. If demand for crude is a little lower than last year and supply is a little larger than last year what do you think crude prices will do ? Go up 35% ? Very basic economic question. I consider WTI to be on the high side of its trading range. Speculators have driven up the price of WTI on a cyclical pattern and they will drive it down also. Long 2 Feb contracts with Feb 58 calls shorted against them at $3.00. Short 6 March contracts at an average of $57.98. When the Feb contracts expire my plan is to short 2 more Mar contracts at whatever price the March contract is trading for at that time giving me a total of 8 March contracts short. Most traders do not write options against their long positions so they normally discount the value of the strategy and revert back to the buy-low-sell-high strategy. This is much more complicated. All my trades in WTI have resulted in $8-10 net runs. This is a very slow methodical strategy based on market makers strategy. The contracts themselves are just vessels for the options trading. When I buy a WTI contract I hold until expiration. I trade only the options. Not the contract. Significantly more money. Significantly. Speculators struggle with this concept.

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By Feb calendar and contract March things could go the way you predict, I am just saying can be more efficient if you short later and higher . You been carrying 4 short s underwater for 2 months . Wouldn’t it be too much risk you accumulated by going into naked short so early? Do you see the options market giving other signs besides the fundermentals weakening to go short ? Thanks 

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I love your options strategy , I witness and learn in real time how it worked beautifully . It’s just that now with the naked short strategy I am a bit confused but let see , we not there yet 

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So does backwardation and contango figure into your selection of strategy or is it something else in options that I don’t know ?

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Dec 30 

  In the past as the contracts have expired I've gone to cash and waited fo a lower entry price. Eventually I get my entrance price. Missed out on an opportunity...twice. I am short 6 March contracts. They expire Feb 20th. Almost 2 months from now. I am still long 2 Feb contracts with Feb 58 calls shorted against them at $3.00. The COT reports today at 2:30 pm EST. The last time the COT was at this level was April 26. WTI closed at $65.18. Within 2 months WTI hit $50.72. My average short price is $57.98. My average may go higher after the Feb contracts expire if WTI stays above $60. I shorted at 56.75, 57.75, and 60.44.

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Late post...

Short 1 from 61.65

Target 59.65.   Stop now @ +6t (backtesting now to see where to add a trailing stop)

SnipImage5.JPG

Edited by OilProspector

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An Iranian general killed in an airstrike in Baghdad. How does that happen ? Why was he there ?

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Bought 5 Feb 63 puts at $1.00. Still short 6 March contracts at 57.98. Long 2 Feb contracts with Feb 58 calls shorted against them at $3.00.

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Huge build in Distillates and Gasoline... offsets draw in Crude Oil Inventories.... hummmmm

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Gary did you just double down on betting CL price going down with purchase of 6 Feb puts ? Why ? Iran crisis not gonna drive oil up ? Or because you think it’s a set up like the last drone attack .  Pricing fall right after that . 

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Jan 6 2020

You made me freak out a little bit. I am long "5" Feb 63 puts at $1.00. Not 6. But yes I am basically "doubling down" with my logic being that US crude exports into that area will be greatly curtailed and will end up in US storage. Also long 2 Feb contracts with Feb 58 calls shorted against them at $3.00. Short 6 March contracts at avg of 57.98. Big loss on those so far.  Closed a 15,000 share short position in RIG at $7.15 on Friday. Probably should have held the position. May re-enter.  WTI opened at $63.48 today. 

Edited by Gary LeBlanc

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My everyday calendar popup reminder... "Exits must be built into the strategy. Failing to take a loss may work ‘here and there’ but eventually the inability to take a loss will result in the inevitable evil runner. That one trade that runs against you. And it keeps on running. Until it grinds your account down to pocket change."  ~ 

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To add... when I was trying to "perfect" my system in CL (and still in SIM mode) I "thought" I could average up/down and the market would always come back and get me out at breakeven... well needless to say I kept averaging up and the next thing I know I'm down $100k. Lesson learned. It proved that the market can stay irrational longer than you can stay liquid.

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I think you're applying your trading rules to my strategy. My exit strategy is based on expiration of the options. I short options against my contracts. Once that is accomplished there is no " exit strategy" required. That is a retail-trading strategy. I don't retail trade my WTI contracts. As of now my "exit" price is $61.00 for the Feb contracts with a net purchase price below $50.00. I'll take that every time. My short 6 March contracts at $57.98 is obviously underwater, but I will add 2 more once the Feb contracts get sold after the options expire giving me 8 short March contracts. 

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31 minutes ago, Gary LeBlanc said:

I think you're applying your trading rules to my strategy. My exit strategy is based on expiration of the options. I short options against my contracts. Once that is accomplished there is no " exit strategy" required. That is a retail-trading strategy. I don't retail trade my WTI contracts. As of now my "exit" price is $61.00 for the Feb contracts with a net purchase price below $50.00. I'll take that every time. My short 6 March contracts at $57.98 is obviously underwater, but I will add 2 more once the Feb contracts get sold after the options expire giving me 8 short March contracts. 

I completely understand your strategy... was commenting more directly with your RIG short... which you hit max pain. Now onto your DWT position... but if your going to hold your March position in CL (without being able to sell options against the position) and you are convinced that CL is going down down down then you should hold onto the DWT position. Your short CL (6 Mar), Long DWT (which is a 3x short ETN), long 5 Feb 63 Put options ~ heavily married to one direction (down) but I truly wish you the best-of-luck and hope it goes down ~ I will catch the (sine) wave. I trade long, short, long, short, et. al. so I will catch the wave most times.

Edited by OilProspector

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My analysis indicates a price in the mid 40s. If the conflict in the Middle East has a negative effect on US crude exports then builds will start showing up in WTI. Builds already exist in other categories. Speculator driven. Always the bagholder. 

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Jan 6

 

Hi Gary, I am long 10k DWT entered at $3.32, agree with you that prices are going down to @ $54 over next 3-4 months. I am refunding my futures account, will shift to 1-2 contracts short on CL once funds clear. Still thinking about how to enter your options strategy if spot is >> $58, but for now, agree on waiting for spot to come down rather than hedging. 

Edited by marie elena

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