Category Archives: Options

Day Trading Risk Management

Staying in business day trading is about preserving capital while getting good enough to learn to be profitable. There really is no down side to learning skill of risk management, because it treats trading like any other business with income (profitable trades) and expenses (losing trades). Even if trading is not profitable right away, then preserving capital is psychologically really important because it will at least enable you to walk away and do something else with the money. Typical day trading experience is to lose most of account over a few weeks then either take a break or move onto something else, then maybe refund account to try again later with new money.

There are many articles written about winners, but handling losers mechanically with limited psychological damage is equally important. Importantly good risk management will not make a losing strategy profitable, but it will slow the decline down while being able to adjust the strategy approach.

In spirit of full disclosure up front – this post only includes losing day trades!

Main areas for risk management are:

  • Position size and stop losses – how much to risk per trade and when to exit losing trades
  • Average expected price range – how much $ profit to expect relative to daily stock price moves
  • Risk reward ratio – how much to risk, compared to how much to win.
  • Actual trades – Example losing day trades on Valero (VLO) to illustrate these risk management concepts.

Position size and stop losses

Usually managing losing trades means having a defined exit plan to cut losses at a particular percentage of the portfolio. A rule of thumb would be to risk 0.5% to 1% for standard trading, and 2% for high conviction positions. This risk per trade is percentage of entire portfolio, not the maximum position size. For example a $100k portfolio risking 0.5% would risk $500, so trading a 1000 shares x $50 stock would give a stop loss at $49. Having the right risk per position is really important before starting to day trade, because it automatically answers the question “how much to trade”.

Below is a very simple example to illustrate how position sizing impacts portfolio risk. This shows how betting too much on each trade is a common reason for day trading blow ups.

Following table shows how many losing trades it takes to blow up a $100k portfolio risking set dollar on each trade (R). The “risk of ruin” scenario is how many consecutive losses would need to happen for the portfolio goes to zero. The last % column gives the probability of portfolio blow up, assuming each losing trade outcome has a 50% chance of a full loss (e.g. like a 50%/50% coin flip that naively does full “win” or full “loss”). This shows how reducing risk per trade (R) can have a huge impact on “staying alive”. Essentially if R is too large then a complete portfolio blow up is very likely since will inevitably will encounter a string of consecutive losses.

%RLosses“Risk of Ruin” scenario%
0.5%$500200Lose 200 times in a row $500 per tradetiny
1%$1,000100Lose 100 times in a row $1k per tradetiny
2%$2,00050Lose 50 times in a row $2k per tradetiny
10%$10,00010Lose 10 times in a row $10k per trade0.1%
50%$50,0002Lose twice in a row $50k per trade25%
100%$100,0001Lose once risking it all on one trade50%
Blow up Risk scenarios

Average Expected Move

Average expected move is the dollar amount a stock would be expected to move over a number of days (all other factors being equal). This is useful for day trading to decide when to take profit. For example, if the expected daily range is $2 and a trade has an unrealized profit in the range $1 to $2 it could be time to consider taking profits. Average expected move is useful for trading stock ranges on “normal” trading days (not driven by individual stock events). News events can increase volatility and easily move stocks beyond their expected range – so it is important to remember this is the average move, not guaranteed. Average expected move shouldn’t be the only exit criteria, but can help assess if a trade is getting closer to the end of a daily move.

The formula for expected move over number of calendar days is:

(Stock Price) x Implied Vol x SQRT(Days/365)

SQRT is standard square root function

Making some simple input assumptions will show different daily expected for various stock price and implied volatility on the same stock.

  • Stock Price: Will use approximate low ($100), mid ($120) and high ($140) stock price ranges for VLO over last year. The expected move formula doesn’t really care about which stock is being trading, just that there is a current price.
  • Implied Volatility: Since VLO average (“avg”) implied volatility was 30% having a range of percentages either side can represent “low” and “high” volatility environments. “Low” and “high” implied volatility is relative to the average implied volatility for a specific stock, so these percent ranges should definitely be adjusted for each stock that will be traded.
  • Days: Since only considering day trading here will use Days = 1. Longer term investors can adjust Days for their expected holding period to see how expected move adjusted over longer time periods.
  • Daily expected moves: Up or down (+/-) dollar expected 1 standard deviation move over 1 trading day. e.g. If stock price is $100 and implied volatility is 10% then the expected move of $0.68 means 1 standard deviation price range of $99.32 to $100.68. The expected move formula for this example would be 100 x 0.1 x SQRT(1/365)
Implied Vol

Stock Price


VLO daily expected +/- $ moves for various stock prices and implied volatilities

Risk Reward Ratio

After establishing average expected move, next stage is to decide the dollar move to use for risk:reward ratios on a day trade. Risk reward ratio is maximum risk for losses versus profit target for winning trades. Typically a risk reward ratio shown as a win:loss ratio. For example profiting $2 on winners and $1 on losers would a 2:1 risk reward ratio. Assuming each trade was either a full “winner” or full “loser” always holds true, this would mean that on average would only need to win 33% of time to breakeven:

(loss probability x loss amount) + (win probability x win amount)

0.66 x -$1 + 0.33 x $2 = $0 (breakeven)

However in reality the exact win rate can be hard to determine perfectly on day trading, because sometimes neither winning nor losing targets are trigger in daily trading action. For example with a $2 profit target and a $1 stop loss, stock may only move in $0.50 range from trade entry . Since day trading usually requires being flat at the close, then it could be that many trades need to exited due to time constraints not because of hitting any profit/loss targets.

In summary trade exits using Risk:reward ratio criteria are usually due to:

  • Profit target reached (e.g. $2 profit target)
  • Risk Management kicked in (e.g. $1 stop loss trigger)
  • Running out of time at market close (e.g. $0.25 loss or $0.50 profit forced to be taken in last 30mins of trading).

The target win $ amount should be close to the daily average expected move, to have an expectation of triggering some winners on some trading days. For example for generating consistent daily winners it doesn’t typically make sense to have a $1.25 profit target on a $100 stock, if stock is only expected to move $1 per day (because on average it will never get triggered).

In general it is better to avoid trading the first or last 30mins when beginning trading, until get more experienced. Trends tend to be easier to follow during the day and moves are less volatile. Plenty of experienced trading use open and close stock price movement to their advantage, but when starting it is better to stick with pre-determined entry/exit decisions in slower moving markets. Learning to be disciplined managing risk in slower stock trading times will help make correct risk cutting decisions in fast moving markets. This will help instinctively cut losses, instead of letting a fast moving market due quick portfolio damage.

Using statistics is useful for day trading, but not a guaranteed outcome, but over many trades they will tend to trend towards expected outcomes. The key is to avoid single huge down trades and always be able to mechanically take profits or control risk (with stop losses). Controlling risk is as important as trade entry over the long term.

Actual Trades

In Oct 2023 the VLO stock price is around $125 with about 30% implied volatility which gives an average expected daily move of about $2.

125 x 0.3 x SQRT(1/365) = $1.96 (rounded up to $2)

Using day trading capital for this stock of about $50k would like to risk about 1% per trade or about $500. So trading 500 VLO would give a $1 stop loss and $2 profit target with about a 2:1 risk reward. The profit target is the average expected daily move.

The notational value (price x shares) of 500 VLO is about $125 x 500 = $62,500 so using about $12,500 intraday portfolio margin for the $50k portfolio. That is only about 20% on margin, so not over leveraged for day trading without overnight risk.

The 500 share size to trade was a one time calculation used for trades in that calendar month. It could have been recalculated every day (e.g. trade 498 shares one day, then 502 shares next day if the stock price or implied volatility moved around). However that would be overkill and hard to compare trading tax lots over the month.

For individual trading account calculating the risk monthly (or weekly) and keeping the trade size consistent is usually enough. Have an idea of the risk to manage now, then generally only then adjusting if markets move massively outside the range for the current share size. For example, if the stock price moved up to around $150 then might cut share size to 400 to be risking 1% of portfolio. Many traders stick with round lots (100 shares) to get better fills, but there as trade execution is improving on odd lots (especially with advent of fractional shares) trading odd lot sizes (e.g. 34 shares) will likely be less of an issue.

Strategy Approach

  • Day Trading only one position per stock that is entered and closed out as one trade, so only one taxlot is opened at a time – this makes a simple PnL easy to calculate and compare.
  • Max risk is $500 per trade
  • Daily time out stop loss is $1000 on all trades for day – if lose that amount stop trading and wait until the next trading day to resume
  • Try and let trade work and use wider stop losses to allow longer holding periods – best performing trades are 1 to 2 hours long
  • Side is Long (stock) or Short (stock)
  • Mins is the actual minutes in the trade
  • Don’t take opposite trades to general market action if strong trend is in place – e.g. don’t go short if market is bullish
  • Don’t watch trades and move stops. Let setup run – if stop is set correctly trade should have enough room to waffle around to price objective
  • Don’t repeat the same trade again if it just didn’t work first time (that’s not risk management, its just chopping and changing same position)
  • Don’t set stops exactly at previous high / low – give a bit of room for everyone else’s to get hit
  • Check individual stock earnings calendar before trading short (stocks tend to be supported into earnings)
  • Check event calendar and don’t trade over events (e.g. FOMC meetings)
  • Trends can reverse quickly (e.g. if morning is bullish then afternoon can be bearish etc) – so re-evaluate opinions for morning or afternoon session or after market events. Ok to maintain open position but should at least re-evaluate direction bias.

Trade 1

VLO Short Stock – Oct 9th 2023
QtyPricePrincipal AmountFeeSettlement
PnL% MoveOutcomeSideMins
2023100911:56:45 AM ETVLOSold Short 500126.500063250.000.2863249.72

2023100901:40:27 PM ETVLOBuy to Cover500127.550063775.000.0063775.00-$525.28-0.83%LoseShort104

Trade Entry: Sold short just before lunchtime based on VLO having trouble getting over $127 and historically breakdown in afternoon from previous sessions. Wide trading range of $129 to $124 in first 30 mins so figured plenty of range.

Trade Exit: $1 Trailing stop was too wide $0.50 over historical resistance at $127.00 to prove short wasn’t working and should probably have been about $0.65 (0.5% total trade risk) to just over resistance at $127.15. VLO nearly breakdown several touches of $126.50 but ultimately rallied over $128 by 2.30pm. Not “bad” trade just stopped out – monitored but didn’t not move stop, so just let price take out the stop

Trade 2

TradeDateTimeSymbolTxnTypeQtyPricePrincipalAmountFeeSettlementAmountPnL% MoveOutcomeSideMins
2023101310:41:45 AM ETVLOSold Short 500126.020363010.150.2863009.87

2023101311:00:09 AM ET
VLOBuy to Cover500127.065663532.800.0063532.80-$522.93-0.83%LoseShort19

Trade Entry: Sold short near low but immediately didn’t get confirmation so maybe should have moved stop tighter if it doesn’t work right away

Trade Exit: Stopped right at short term peak that spiked in about $127.20 – probably worse timed trade, but market ultimately went to $128 so would have been worse if ignored stop

Trade 3

FeeSettlementAmountPnL% MoveOutcomeSideMins
2023101311:36:43 AM ETVLOBuy to Open500126.900063450.000.2863449.72

2023101303:52:01 PM ETVLOSell to Close500125.890062945.000.0062945.00-$504.72-0.80%LoseLong256

Trade Entry: Went long about $126.90 after minor retractment (after short didn’t work) on theory that market was bullish because was constantly attacking $127

Trade Exit: Theory was correct market got all way up to day high $127.90 in less than an hour, which was obvious stopping point being previous high on open. However this was a “popcorn” trade that popped all way up to about $128 but ultimately rolled over all day before finally being stopped out near the close. After it rolled over close to nearly $126 did consider exiting at resistance at about $126.50 on the rebound, but decided to respect the original stop and not move the stop up.  Could benefit from trailing stop to avoid full retrace issue (at least this should have been breakeven not a loss).


Found out some interesting things from above analysis:

  • Using average expected price range as a winning trade profit target was not hit often enough, so even winning trades were never exited.
  • Trades tend to be wrong in the same direction over time (e.g. if it was going to go down $0.50 it was going keep going down $1).

Need to experiment to retry with lower $ stop losses and profit targets . For example $0.50 stop losses, $1 profit targets. Initially would keep existing 500 share position (but that would only be risking 0.5% of portfolio per trade). If successful could scale back up to a maximum of 1000 shares position size to risk 1% of portfolio per trade.

Day Trading risk management strategy is work in progress, but important thing was to manage overall risk when experimenting with approaches.

Natural Gas Exit 2022

This Jan 2022 update explains the hedging and ultimate exit for all our Natural Gas position in UNG ETF. The original trade was started in March 2021 approximately 10 months ago. Recall from our previous Nov 2021 update we had added option trade overlays that take advantage of the higher option volatility on the Natural Gas ETF (UNG). These all expired worthless, leaving the underlying ETF position and ITM call options.

Natural Gas Exit 2022 – Hedging

Hedged entire position on 1st Dec 2021 (around $14) with 100 contracts at $13 put into Jan 2022. This was important because it enabled the UNG position to be held with huge down move to around $12 throughout Dec 2021 with the ultimate recovery back up towards $16 in Jan 2022. Throughout most of Dec 2021 UNG was in a range of between $11 and $13 with little movement outside that relatively tight trading range. This month long trade range was usually given the previously directional trending UNG price for the last 6 months.

Although the $13 put Jan 2022 hedge was ultimately a money loser, it did enable the position to be hedged towards the end of the huge downdraft from $20 (Oct 2021) to $12 (Dec 2021). Ultimately enabling exiting with the overall UNG position with a profit in Jan 2022. Just because the hedge doesn’t make you money, doesn’t mean it is useless – the overall position of underlying, plus any hedges, is the main consideration.

Natural Gas Exit 2022 – Sell Longs 

Sold majority of long exposure on Jan 12th 2022 in two main trades during a large price rally up to over $16. First selling the underlying ETF 5000 UNG at $15.35 in the morning. Second selling the 50 long ITM Call strike $11 Jan 2022 in the afternoon for $4.98 (with UNG at about $15.99). This gave an average share price exit of about $15.67 on Jan 12th. The deep ITM calls were due to expire the following week and were trading like stock (about 99 delta). Therefore it is appropriate to use their sale price (with the UNG ETF position as well) to calculate an average exit price for the overall position. Looking at the 5 day chart for the week 10th to 14th Jan 2022 shows that this trading ended up being some of the best pricing for the week.

The position was exited quickly (all on the same trading day) when the opportunity presented. This was because half of the position was in deep ITM calls that were going to very likely be assigned (with an $11 strike) on January option expiration on 21st Jan 2022. It is hard to time the exact top in a market that aggressively moving higher, but on this occasion it was traded well this week.

Natural Gas Exit 2022 – Spreads

After most of the long deltas were sold, still need to sell remaining spreads in final week of Jan 2022 expiration. To further complicate matters this was a short trading week with only 4 trading days from Tues to Friday (because Monday was a trading holiday). The positions held on 18th Jan 2022 at start of trading week were 1) a bull call spread long $16 and short $18 expiring 21st Jan 2022 and 2) a bear put spread long $13 and short $11 expiring 21st Jan 2022. These options were the last remaining UNG positions in spreads only, so was much lower risk that long deltas previously held. The expectation was that there would continue to volatility in the final expiration week and that would generate an outside move in either direction. To make some money on at least one of these spreads, then UNG had to move quickly in either direction and not stay in a range. As it happened the market crashed down and on 20th Jan 2022 at under $13 the $13/$11 bear put spread was taken off with some time value remaining to extract at least some value from the hedges (rather than zero by expiring worthless in a few days). The $16/$18 bull call spread was a full loser.

They was no obvious catalyst for an extreme move in either direction after option expiration on Jan 21st, because presumably this cold spell would be short lived. Therefore no new option positions were rolled or started. Additionally holding UNG long term is typically not a good long term multi year trade due to in built ETF decay, and this position has been held for about 4 months so far (which would likely include some ETF decay). Since there was no desire to maintain a UNG position into the rest of 2022, then all positions either expired or were taken off – leaving no open positions after 21st Jan 2022.

Natural Gas Exit 2022 – Future Idea

There was one potential strategy that wasn’t used at the time, but that could be useful in future. However this can usually only be considered when the call put skew is 2:1 on call side – as was the case in the large price spike into Oct 2021. Since the equivalent OTM call premium was twice that of the equivalent strike OTM put premium, then it was possible to sell 1 call and buy 2 puts for an even money collar. For example in Oct 2021 with UNG at $20, could have hedged with short 1 call Dec 2021 strike $24, but long 2 puts Dec 2021 at strike $18 – all for even money.

That gives an interesting risk profile:

If the market goes up a lot then that would still have given decent upside potentially, obviously capped out at the short call strike.

If the market stays in a range, then ultimately the 1 x short call and 2 x long put would lose value and ultimately expire worthless. With hindsight, this would be equivalent to holding the position without any hedges – but obviously risk management on larger positions is important to preserve capital – did not KNOW that this would be the case in advance.

If the market goes down a lot then importantly money could be made in an extreme crash – because the doubled up puts actually make the natural gas position to go net short the lower UNG prices goes. This works because even though the underlying UNG ETF position (with a delta of 100) is declining, having double the number of puts means their negative deltas can more than offset the underlying position. For example if UNG was at $15 then the deltas on the doubled up puts would be approximately 65 delta + 65 delta = – 130 delta. Since the UNG delta will always be 100 delta, the overall position would have a delta of 100 (underlying) minus 130 delta (double puts) – for a total of about negative 30 delta. This is what actually happened with a move down towards $12 in Dec 2021.

So with hindsight this 2:1 collar would have been a great strategy to participate in the upside and the downside. Especially when the Natural Gas market expectation was significantly higher prices in the next month (high OTM call premium), but where history shows huge crashes over a few trading sessions are possible (look at any multi year historical price chart). If this situation presents itself in future, then the 2:1 collar strategy is one we would definitely consider.

Natural Gas Exit 2022 – Summary

Using some hedges (such as the $13 put) allowed us to maintain the position during the dip down to nearly $12 (and lower) in Dec 2021. This would have been very poor risk management to maintain that size of position without a hedge, even though in the end would have made more money without the hedge. The ultimate exit was quite fortunate as were running out of time with Jan 21st 2022 option expiration less than 10 away. There was a huge futures price spike due to storm and cold spell that enabled a swift and profitable exit. However in Oct 2021 this could have executed or hedged at around $20, so this did “leave” about $4 of UNG “on the table” (or about $40k) with better trading. In summary made about 200% but could have made 500% with better trading.

Natural Gas for Winter 2021

This Bonfire Night update on our 2021 Natural Gas (NG) position trade explains why our existing NG exposure is being maintained even though the price has run up a lot. We will discuss how the seasonal factors and option pricing skew have persuaded us to add to the position trade and hold through Winter 2021. However due to the high price rise, we will only be adding option trade overlays that take advantage of the higher option volatility on the Natural Gas ETF (UNG). If UNG runs higher then these new option trades will make money up to a target strike – but if UNG stays the same or sells off then they will expire worthless.

Natural Gas Winter 2021 – Existing Position Trade

The existing NG position has already been quite profitable. To recap the existing position trade has two main parts 1) 50 contract Aug/Sept calendar spread – that is short $15 Aug 2021 and long $15 Sept 2021 pair for total cost of $0.22 and 2) 50 contract long underlying LEAP call Jan 2022 $11. See the previous long natural gas since Q1 2021 post (from July of this year) for all of the background to how these UNG positions were traded starting in March 2021 . Anyhow as luck would have it, in August 2021 the NG market pulled back and allowed the short UNG Aug $15 call (the short call in the calendar spread) to expire worthless. Fortunately the market rallied back strongly in Sept 2021 because the only remaining position from the calendar spread was the long Sept $15 Call. This call ended up $2.65 ITM with UNG $17.65 on Sept 17th. This meant that there was a market enforced trading decision to make with following possibilities:
1) Sell to close $15 Sept 2021 call for an immediate profit.
2) Roll into another call in a future month (e.g. Dec 2021 or Jan 2022) further out in time. The term “Rolling” here means sell to close the existing call, then buy to open the new call.
3) Deliberately get assigned UNG at $15 and create a new ETF position

Normally we would consider the original Aug/Sept calendar spread as one self contained trade, and simply close for a nice profit (option 1). However we decided to push the envelope, and keep UNG trade on since it was acting very bullish. Hard to know where the top is in a strongly rallying commodity. Commodities can tend to have blow off tops, when supply/demand move to extremes. This isn’t obviously a guarantee for a similar blow off top high in NG, but the chart pattern is similar. historically NG can rally very fast. So on balance decided to maintain the larger position.

The issue with maintaining position was that option volatility was very high. This meant that rolling (option 2) would have required purchasing $2 or $3 of pure time value to roll to similar $15 strike in Jan 2022. So rolling long calls when volatility is that high is not desirable, even if it is more capital efficient (than just buying the ETF outright). UNG would need to rally about 20% by Jan 2022 just to break even.

Therefore decided to go with getting assigned at $15 and creating a new UNG share position (option 3). Deliberately did nothing until Sept 17th expiration Friday, then as UNG closed over $15 our account got assigned on 5000 shares UNG. As a reminder – one option contracts controls 100 shares, so 50 contracts x 100 shares = 5,000 shares. The trade was already in the money with some profit, so that gives some buffer before losing money on the actual ETF position (if UNG were to pull back). However this requires using $75k cash to buy 5000 shares at $15. The brokerage will assign ITM calls automatically, so on the Monday after expiration will be long 5000 UNG shares. This did not require purchasing any time value with options because a stock or ETF position has no time decay (no theta value). Sometimes it is “ok” to use ETF (or stock) to compliment the overall position, specifically because ETF positions don’t decay with time. It also allows selling options against the stock to bring in some time value.

The overall position is now 5000 UNG and 50 Jan 2022 $11 calls. This combined position has a delta of nearly 100, because the Jan call is so far ITM it is trading almost equivalent to a stock or ETF position. Stock or ETFs always trade with a delta of 100 because they are the actual underlying for any derivative option (and have no time decay). Therefore the overall UNG position here is almost equivalent to 10,000 shares. The average price of the new long UNG 5,000 shares is about $15.22 (including the profit from the expired short Aug call). The average price of the Jan 2022 $11 call was $0.94 so UNG can pull back to about $11.94 before that starts losing money. For simplicity this ignores any time embedded value in the call – in reality there would always be some time value in the call – unless it was the final trading hours into Jan 2022 expiration. Getting back to estimating the breakeven point – this gives us an approximate break even point of $15.22 + $11.94 / 2 = $13.58 for this unrealised long UNG position. This is a very aggressive position sizing, however this is an example of pyramiding into winners – which we are trying to do as improved trading discipline (but it is surprisingly hard to do). We are hoping to get a market top at higher prices, and are willing to let the underlying unrealised profit thrash around. Hopefully it will go higher, because the trend is up. Keeping one very successful unrealised profit trade open is very hard to do physiologically. The pull backs always feel difficult to hold through, because always pricing relative to the latest price peak. For example, “if we’d sold last week, now we’d have $20k more than today”. The issue is that if you sell before a big move is fully realised, then you likely aren’t getting back in – no matter how good your technical analysis is at identifying top and bottoms. We are attempting to apply the trading logic from Reminiscences of a Stock Operator – “The big money was not in the individual fluctuations but in the main movements – that is, not in reading the tape but in sizing up the entire market and its trend.” and “It never was my thinking that made the big money for me. It was always my sitting.”. There is no guarantee that NG will hold up and has a history of huge sell offs, however if don’t hold then are foregoing possibility of very large gains.

Natural Gas Winter 2021 – Call Volatility Skew

In additional to the winter seasonality advantage, the overall position trade is being maintained partially because the near term options skew to the upside. As NG is entering into Q4 2021 there is significantly implied volatility in near month options indicating that potentially a much higher price move is still quite possible. Additionally there is currently an incredible call option upside skew, when compared to put options.
The following is the Dec 2021 UNG option chain on 26th Oct 2021:

With UNG at $20.40 comparing the 30 delta calls and puts for Dec 2021 (53 days time) shows a huge call skew. The option market thinks that UNG has a 30% probability of closing at $18 to downside ($18 put with 0.3067 delta) or $32 to upside ($32 call with 0.2970 delta). To put this another way – UNG options were implying in 53 days time that a $2.40 move lower had the same 30% probability as an $11.60 move higher. That is a 4.8 to 1 upside skew in calls versus puts at the 30 delta option! This level of skew is not normal, so we may be able to structure some short option strategies to take advantage.

Since the main position trade consists of long stock and deep ITM calls, we can change option strategy to take advantage of high volatility. Additionally would like to be greedy and make even more if UNG rallies into winter 2021. However do not want to add significantly more capital into UNG. Therefore will look at very wide 2:1 ratio call spreads, partially financed by way OTM short puts.

Both of these high volatility option strategies are available with option legs a long way OTM because UNG volatility is over 100%. As the following 1 year chart of UNG volatility shows – implied volatility has been over 100% at some points in Oct 2021, peaking around 120% in early October with a low point of around 90% in mid October.

The trade construction is Buy 50 contracts of a call at high OTM strike, then sell 100 contracts at even higher strike. This a 2:1 ratio call spread is called that because the number of call contracts at the higher strike is usually double the lower strike – in this example a 100 contract: 50 contract ratio call spread. The 2:1 ratio call spread is typically placed for small credit or debit, then idea being to get the 100 contracts sold to approximately pay for the 50 purchased contracts. It can be hard to find match the exact strikes for an even money (no credit or debit) so often there is a small debit or credit.
To help pay for any debit incurred and to maintain a small positive theta (time decay) in the position, we will also look to sell an OTM put for a small credit. The 2:1 ratio call spread is better added as a compliment to an existing bullish ETF position in a high volatility environment because the strikes can be placed further apart. The further apart the strikes, the more profit potential.

For example this trade was done in the Nov 19th 2021 option expiration cycle with long 50 call contracts at $30, short 100 call contracts at $38, and short 50 put contracts at $13. Note this option structure means that have to deliver 5000 shares at $38 because of the extra 50 contracts short – however this is fully covered because we already own 5000 shares.

This was repeated on Dec 2021 option expiration cycle with long 50 call contracts at $28, short 100 call contracts at $38 and short 50 put contracts at $12. This option structure was also fully covered because we already own the 50 call contracts Jan 2022 at $11. Should UNG reach $38 at Dec expiration we would be able to deliver the 5000 shares (via the 50 contracts of the Jan 2022 calls).

These are covered positions on the upside, but with an another important kicker. If UNG closes over the $38 at Nov expiration, then profit would be equivalent to a close at $46. The embedded call spread (long $30, short $38) would be worth $8. So having to deliver ETF stock at $38 (from the $38 call), would be give an equivalent exit price of $38 (short call strike) + $8 (embedded call spread max value) = $46.

This logic would also repeat for Dec. If UNG closes over $38 at Dec expiration, then profit would be equivalent to a $48 closing price. The embedded call spread (long $28, short $38) would be worth $10. So having to deliver ETF stock at $38 (from the $38 call), would be equivalent exit of $38 (short call strike) + $10 (embedded call spread max value) = $48.

If this very bullish scenario were to take place, then it could be possible to maintain the position by do some rolling adjustments nearer to Nov or Dec expiration. However if UNG was massively over $38 it would probably just be simpler to let the entire option structure expire and take the full position profit.

On the downside the short put is cash secured, and is definitely a downside risk that would need to managed if NG drops significantly into winder 2021. This is a possibility, because anything can happen in the market, but not likely. However on trade entry the short put had an 11 delta, which means that it has an 89% chance of expiring worthless at Nov or Dec expiration. A short put trade seems worth the risk, since we are bullish on NG price (it should maintain over $13 by Nov option expiration) and bearish on NG volatility (think volatility will decline from current elevated levels). Short 50 contracts in Nov expiration at $13, and short 50 contracts in Dec expiration at $12. These short put credits help finance the slightly debit for the 2:1 call ratio spreads.

One nuance to the put selling approach is that they are diagonal at lower strikes the further out in time they go. The Dec $12 strike is lower than the $13 Nov strike. This is to allow for market probabilities to play out into Dec (50+ trading days to expiration) and Nov (only 30+ trading days to expiration). There is more time for the a down move to occur by Dec, so it makes sense to sell a lower strike in Dec than Nov. Either way the probabilities are similar, because on trade entry both Nov and Dec short puts were around 11 delta.

As the 2:1 ratio calls and short puts have been held for several trading days, the market has moved down from Oct 20th to Oct 26th. However the Nov short put is now almost worthless. The volatility in the calls has reduced, so that the $38 short calls have made money and more or less cancelled out the loss of the $30 call. This entire structure of $30/$38 2:1 call ratio and $13 put short, should expire for an approx $600 profit – if UNG is above $13 by Nov expiration.

Similarly the Dec structure volatility has reduced, however the Dec options still have some bid, because the chances of UNG being able to move to option strikes by Dec is more likely. These Nov and Dec 2:1 call ratios will be maintained until expiration, as they represent a “free shot” at UNG being over $30 in Nov and $38 in Dec (with no incurred cost). If a price near $30 ever happened the calls would jump to life again, even if they have a very low probability and so a low price today. This is “ok” because the market paid the premium of the lower call for us as they were financed by the 2 short calls – which is why it is a “free shot”.

Natural Gas Winter 2021 – Speculative Butterfly

Since there will be a $30 call held until 19th Nov expiration, we wanted to add a small speculative long, but with low risk. So we bought in the Nov 26th weekly cycle a 50 contract butterfly $24.5/$30/$35 for $0.29 – total cost about $1500. Normally don’t pay for premium, but considered it partially financed by the short puts from the earlier Nov/Dec trades. It is total speculation, but would be more likely to hit (as only 20% OTM on trade entry). The maximum theoretical gain for this new speculative trade is exactly $30 on 26th Nov and would be about $28,500. Sometimes added a butterfly in high volatility as a compliment to an existing position gives something to focus on in the next expiration cycle, while waiting for the main underlying UNG position trade to play out. This gives some entertain while waiting for the underlying UNG position trade to hold into Dec 2021 and maybe longer in Jan 2022.

Natural Gas Winter 2021 – Summary

Natural Gas (NG) price has consistent seasonal drawdowns typically in winter for home heating from November to March. In 2021 there are potentially a sharp spike in near term prices, because of recent inventory dropdowns before coming into the typically higher demand winter season.

A good source of fundamental NG news is Despite fundamentals pointing to warm weather in Nov, NG is flat for October (albeit with huge amount of volatility in a range). The lack of significant decline in October in the face of bearish warmer weather could be seen as bullish for rest of 2021. The following summary chart shows UNG price action and volatility in context of the last year’s trading:

This was an update on how to lever up the existing LEAP call and ETF position, using options to potentially increase position trade return. The aim is to maximize return from a commodity price spike over the next 1 to 3 months over Winter – this is not a forever long term hold. The trade exit for this will possibly be in Dec (to close year end trading nicely) or maybe by Jan 2022 (for 2022 taxes). Not entirely clear if this becomes a structural bull market for NG in next few years (and we accidentally bought the bottom). More likely scenario is that NG supply is tight and demand is up in winter 2021, so better to sell into any major price spikes in Dec or Jan. The underlying NG future (near month Nov) is around $6, so if there was a spike towards $10 then traders would probably look at double figures as a logical point to take profit. When trading UNG it is important to look at underlying /NG futures because that is where the majority of NG trading is done. UNG ETF does trade in a liquid way, but it is not the entire market. Price targets and support/resistance in UNG will not impact trader sentiment as much as price targets being reached in the /NG futures. In short /NG futures drive the NG market, not UNG ETF. UNG can also experience much more volatile trading days leading into monthly /NG future expirations. So knowing the exact monthly /NG future expiration dates can explain UNG moves.

In summary we are maintaining position trade over many months, and complementing it with option strategy overlays to hopefully boost returns. The intent is to be long into year end and re-evaluate along the way. The position is bigger than usual with “high conviction” . The position has been correct for several months now, so some amount of unrealised profit volatility can be tolerated. the position will likely ultimately be stopped out by short calls meeting profit targets.

Long Nat Gas since Q1 2021

Natural Gas (NG) price has been consistently declining due to significant over supply for the last few years. In general there are consistent seasonal drawdowns of NG supply throughout a trading year, usually due to consumer energy demand for heating or cooling. Typically large drawdowns of NG supply in winter for home heating from November to March. However there can also be periodic supply drawdowns during summer heatwaves with energy demand for home cooling.

Natural gas is historically cheap on an absolute basis, but needs a catalyst to justify a longer term higher prices. The historically cheap price is encouraging countries to reevaluate its use. NG is not considered as “clean” as alternative energy being found near oil deposits. However practically energy will have to come from somewhere. As China’s climate change commitments force transition into “cleaner” energy solutions, they need to plug the gap between oil/coal and transition to alternatives like wind/solar. However NG could becomes up to 15% of China’s energy market by 2030 then that potentially increase demand and maintain pricing this decade. Taking the other side of the argument though, the increase in Chinese NG production into 2030 could dampen the NG price further by over supplying the market.

There could be a good decade long position trade here, but history shows that NG has been following the pattern of lower lows for many years. The following chart shows the Nymex natural gas futures price for Aug 2021 settlement. Starting at $8.88 in Nov 2008, down to a low of $2.21 in Feb 2020, followed by the current price with a bounce back to around $4 in July 2021.

Natural Gas (Aug 2021) futures price for last 13 years…

As the commodity price chart shows – it is hard to justify as a long “buy and hold” trade due to this secular bear market. However it’s rapid spikes make it an excellent trading vehicle, with the right timing. Fortunately 2021 appears to have produced a hot summer that has created a natural gas trading catalyst – so there is no need to wait until 2030 to find out how the trade performed…

Long Hot Summer

The main short to medium term factor driving NG prices is energy demand due to higher than normal US temperatures. Natural gas as a fuel has a different trading dynamic to natural gas producers stock (e.g. such as the FCG ETF). Natural gas price tends to trade off near term supply and demand (up to 6 months out), where as natural gas producer stocks tend to trade off medium to long term expectations for natural gas prices (often 12 months or more out in time). Additionally some producers have locked in contracts (“hedged” pricing) – so short term near month price changes don’t impact longer term prices that could be locked in or haven’t moved that much. The /NG futures curve as of July 2021 is an good example of this phenomena:

Natural gas is not a “forever” trade. However the short term market supply issues mean that pricing can potentially spike in the next few months. One of the main trading vehicles for natural gas is the UNG ETF that attempts to track the commodity price. The implied volatility on UNG options is certainly showing that a large move is possible – with implied volatility moving up from about 30% to over 50% in the last month.

However the July 2021 future curve (from Nymex natural gas futures) is implying a return to “normal” pricing in 2022. From a medium term trading perspective, any significant spikes should be used to reduce risk in the next few months.

The July 2021 futures curve is not always the shape of the commodity futures curve. Typically the main ETFs (such as UNG) that track NG have a structural decay problem, due to rolling futures every month. The ETFs do not hold natural gas as a raw commodity because of storage costs, so they maintain exposure using futures. Usually the ETFs futures holdings are near month to get as close as possible to the commodity spot price. However maintaining this position requires the consistent need to “roll” every month, usually when the near month future gets close to expiration. Rolling means selling the expiring near month and buying the next months future contract. This generates transaction costs every month, but more importantly roll costs can eat away at the capital in the ETF. The next section explains this roll cost in detail.

ETF Roll Cost

More importantly though for the Natural Gas ETF is whether commodity pricing is in contango. Contango is where the price of commodity contracts further out in time are more expensive. Futures prices out in time by many months are sometimes referred as “out on the curve”. The following graph that show an example commodity pricing curve in contango. This example is not for natural gas, so the exact numbers and dates are not that important – it is just a sample contango futures curve to show the idea.

Example contango curve (prices higher in the future)

Contango pricing plays an important part in the long term Natural Gas ETF (UNG) price. UNG typically holds near month Natural Gas futures to approximate the natural gas price. The near month futures contract is normally natural gas for delivery in the next 30 days or less. As the near month contract gets closer to expiration, the fund must roll into the next month’s contract to maintain exposure. If this is not done then the near month contract would expire, and the ETF would acquire several hundred million dollars worth of physical natural gas for delivery! Depending on the funds specific mandate, the “roll” may be done over several days and likely several days prior to expiration. The “roll” is a monthly process to maintain the price exposure.

Using the futures symbol for Natural Gas \NG the following example shows a roll between two separate months. The exact date and pricing shown is not as important as demonstrating the concept. For example if \NG August is $3.50 and \NG Sept is $3.55, then the fund has to sell $3.50 and buy $3.55. This generates a “roll cost” of $0.05 per month (difference between $3.55 and $3.50) just maintain the position. Additionally due to the higher price of the new purchased futures contract, the total number of futures contracts held by the ETF gets reduced. This price difference maybe relatively small (e.g. less than 1.5% of the fund) however compounded over time every month it adds up. This roll loss explains UNG terrible long term performance – as well the actual physical natural gas price trending down.

This chart dramatically shows why UNG is not a “buy and hold” investment, down more than 99% since inception:

UNG – not the best long term investment…

It is important to note that the opposite condition to contango can assist the Net Asset Value of the ETF. The reverse of contango is called “backwardation” – when futures prices out several months are less expensive than near month futures. Backwardation helps the ETF maintain value and only contango has the rolling issue above.

Avoid Buy and Hold

Commodity ETFs like UNG or USO that are often in contango and use near month futures to track the commodity price, should not be held for long term trades. They are tradable for daily or monthly trends, but not usually years.

The other important thing to note is that commodity ETFs using futures don’t always rebound after big crashes. Often contango rolling impact is greatly increased after a crash due to market dislocations in the front month. One extreme example has to be this year in April 2021 when the May Oil price briefly traded at negative $40, but month further out were positive (massive contango). They also do not track the underlying commodity price accurately over a number of years.

This can be shown very clearly when comparing two ETFs that track the oil price using futures – USO and USL. Although both ETFs use futures, USO typically tracks only the daily changes in the near month oil future. USL tries to track the daily changes in the near month to 11 months out (from the near month). That is the average price for all futures contracts in the next year, not just the next month. Since the oil price is often in contango, USL will track it much closer than USO. The following chart shows the huge difference in performance, that can be clearly seen around April 2020 during the “negative oil” futures incident (USO is blue and USL is yellow):

Understanding the futures curve shape and the average duration of the futures held inside an ETF is important before placing a trade.

Trading Position

Options that have over 1 year to expiration are called Long-term equity anticipation securities. They are often abbreviated to “LEAP call” (for calls), “LEAP put” (for puts) or “LEAPS”(for any option either calls or puts). UNG OTM LEAP calls cost a relatively small amount, but can control large position sizes. Depending on how far OTM there is a higher probability (say 60% to 75%) that they lost value slowly over time. However they can only lose the entire premium paid for the position. But if natural gas spikes higher they can quickly go ITM and trade with much higher deltas. They therefore have a great asymmetric risk to reward profile, especially if started during low volatility. They are likely to fail, but if they win they can win big.

On trade entry by definition OTM leap calls will ultimately expire worthless more than half the time (if they were held all the way to expiration. This is because they have a delta of less than 50% on trade entry. When a LEAP call is losing money any residual value for the decaying option can reclaimed by selling at 50%. For example, if originally bought Jun 2022 $12 calls for $1.5 then could sell after it has decayed to $0.75 to maintain some value. Another approach is simply to position size appropriately for the portfolio and let it expire worthless (having already accepted the full risk as part of the portfolio). Alternatively can roll out in time to further six months if want to maintain the position. Our approach is normally to exit position and maintain some value if not working or roll out in time. Don’t normally let the LEAP go all the way to expiration.

To manage upside we would typically take some profit off the table at 100%, if reached in short order. For example, consider buying a LEAP more than 1 year away for $1, then after a price rally selling half for $2 two months later. This means a zero risk trade for remaining 10 months of the option lifetime. The position is now half sized, so will not make as much potential profit. However half sized position can now be allowed to run for many months to see how it does. Since this example position contains no risk it could be allowed to run almost to expiration to see how it does. Unless the calls are very deep ITM (low time value) should consider rolling or selling with 60 to 30 days to expiration to avoid option decay.

Implied Volatility

Paying attention to implied volatility (IV) on trade entry for LEAP calls is important to maintain trade value. Since LEAP calls are sensitive to increases in volatility, rising volatility can provide a trade profit even if the underlying does not move that much. The important IV measure is not just the absolute percentage (%) as “high” (e.g. 50%) or “low” (e.g. 10%). The measure used for trade entry is the percentage (%) relative to the recent IV historical trading range (usually 1 year). Ideally LEAP calls are bought when IV is towards the low end of its annual trading range. For example, assume an IV trading range for the previous of year of 9% to 20%. Buying when UNG IV is 10% would be buying at the bottom of the volatility range. Once the trade is on, looking at option vega will show how much the option would increase with a 1% move higher in volatility (all other variables being equal). It is quite possible to see a significant % profit in a LEAP call if volatility rises quickly. Importantly LEAPs trade on expectations for future volatility at option expiration not on for expectations for the next few days or months. Although short term and long term volatility are usually correlated they may not necessarily move with the same magnitude. A short term spike in IV may not move IV in longer dated LEAPs. For example, a natural gas supply crunch that will likely be resolved next month, may not move option pricing in 12 months because the market expects it to be resolved by then.

LEAP calls are not “buy and hold” trades and so do require monitoring and risk management. Holding the LEAP call only can be a valid strategy. However over the long term selling calls mechanically or dynamically can improve returns and risk management. Selling calls does limit the theoretical unlimited upside, but on average it improves and smooths out returns. Selling calls does not have to be done against the entire LEAP call position, so with some strategies the theoretical unlimited upside can be maintained.

Selling Calls Mechanically

Another form of risk management is selling calls against the long LEAP call. This can be done ATM to try and exit position, but still get some premiums for next month. Alternatively this can be a scaling out exit strategy, to sell OTM calls next month, 2 months and 3 months out. For example if UNG is at $12, sell the July calls at $13, Aug at $14 and Sept at $15. This should give similar option premiums for each call sold, but gives more time for trade to rise and different time frames to sell calls. There is no role on the amount of contracts to sell, and it doesn’t have to match the long LEAP calls contract. For example if already own 100 LEAP calls, could sell 40 calls in July, 30 calls in Aug and 30 calls in Sept.

Alternatively if would like to exit half position can sell 50 next month ATM, leave the rest of the 50 contracts open. This gives the richest ATM premium that gets kept if position sells off. However if half the position gets called away in the next month cycle, then this still maintains half the position for further unlimited upside (no sold calls to cap the upside).

Repeating this monthly call selling strategies several times a year can help pay for the entire LEAP call. For example selling 10 calls ATM for $0.30 in six separate trades over 1 year would pay for buying a 20 LEAP calls at $0.90. This is a somewhat idealized example, because it assumes that the sold calls expire worthless each time. More realistic is to assume that half of the sold call premium is captured, so calls sold through out the year for $0.30 can on average to bought back for $0.15. This scenario is more realistic because it covers many call selling trading outcomes each month. For example selling 10 calls ATM for $0.30 in 12 separate trades could have multiple exit scenarios – some calls could expire worthless (full $0.30 gain) or need rolling into next month (e.g. buy back for $0.70 with $0.40 loss, then resell next month at $0.30). Taking loses on the sold calls still allows the position to make money, because the long LEAP call also increases in the rising market. However if the market rises too fast then sold calls could be hard to roll, so would be better just to exit the entire position.

Selling Calls Dynamically

Another more opportunistic strategy is to wait until IV increases during the year. This becomes more likely if the position was entered in relatively low volatility. When IV spikes up start selling “junk” options that are say 25% OTM. Depending on the level of the volatility spike these can be sold for between $0.10 and $0.25. Selling junk options for less than $0.10 is not recommended because commissions are a greater % of the trade. Also in a volatile market options that are way OTM but closer to zero (in the range $0.01 to $0.10) don’t decay that fast until very close to expiration – because there is always the underlying “threat” of a price spike.

Occasionally the commodity market presents some incredible premium on OTM options. For example on SLV in March 2021 during the Reddit meme stock volatility spike the IV doubled in a week from around 35% to briefly over 70%. During that week sold several SLV call options way over $0.10 that would normally have near zero value. Their volatility was implying a more than 100% move in silver by expiration in less than 60 days. Of course the options ultimately expired worthless, but also the premium got crushed within a couple of days after the high volatility mean reverted (see chart).

SLV Feb 2021 Implied Volatility spike

High IV in call options tends to revert back to a the mean value, which means that on average it doesn’t typically stay elevated for long periods of time – so was a quick return on investment. This mean reversion is why on average call selling works in higher volatility. Importantly having a long LEAP call covers when the underlying moves outside of the average price range – that is when the sold calls go way in the money at expiration. In the above SLV example, the call selling was always covered (not “naked”) because it was done against a SLV LEAP call that was already owned earlier in the year (and established in lower volatility). Admittedly this is one of the most extreme example from a commodity ETF in the last few years. However consistently selling the “junk” options to compliment a fully covered LEAP call position, can make regular income and still keep the long commodity trade idea alive. There is always the possibility of being “called away” on a huge market rally, but that would be a happy occurrence because the LEAP call would have greatly benefited.

Selling Calls for Hedging

One word of warning on dynamic call selling is don’t sell calls that are at or beneath the LEAP call strike. When beginning a trading position that will sell calls, it is better to sell way futher OTM or not bother selling any calls initially. Sell calls over time is to reduce cost basis in trade – in this case reduce the amount paid for the LEAP call. If that uncertain on amount at risk when starting a new position, then simply trade a smaller position size – don’t over hedge to start with.

When trying to rescue a position where the LEAP call has lost money, do not sell strikes in the near month below the LEAP call strike. This is sometimes called an “inversion” position. This position can potentially lose money if the commodity price increases, which the opposite of the original trade idea. This is because if the near term short option goes significantly ITM it will start acting like short stock – with a delta that trends towards negative one hundred (-100). The negative delta on the short call will be greater than the positive delta on the LEAP call (likely in the range of 50 to 70 delta). Therefore the entire position becomes net short. For example, 70 delta (from LEAP call) minus 90 delta (from deep ITM short call) is minus 30 delta (short position). These deltas are realistic examples for what would happen if the commodity rallied 20% with this “inversion” position (short strike call lower than long strike call).

Short calls are great to generate income or exit a winning trade. however when selling calls only to reduce long deltas (i.e. reduce risk) it is probably better just to sell (to close) some long LEAP call contracts. Selling calls should always be a compliment to main LEAP call position, not exclusively for reducing risk by adding short positions to a long position (hedging). Sometimes the best risk management is just to sell underlying position, not try and over hedge with calls. If the concern is losing all the LEAP call premium, then the position size is probably too large for the portfolio.

Portfolio Strategy

Importantly however the slower time decay of this strategy allows holding the entire position through a downdraft, because there is time to recover the loss. No action is required with correct portfolio position sizing, because the risk is accepted on trade entry. The position size can be 1% to 2% of the portfolio for a “normal” trade, or up 5% for a high conviction position trade. In previous trading experience we found that these LEAP call strategy should not be sized over 5%. This is because the position is still all time value and as such is decaying every day (even though daily decay is small). Additionally the combination of strategies in a portfolio is very important. Should not have an entire portfolio of OTM LEAPs as strategy for all portfolio positions. For example, having 20 distinct LEAP calls each with a position size of 5% would be have unmanageable theta (time) decay. Essentially an entire portfolio of LEAPs would have be 100% time value with no intrinsic value. If running LEAP strategies on a few underlying ETFs, then other portfolio positions should be in short volatility strategies (e.g. credit spreads) to compensate for the daily theta decay.

Trading Update

Trade entry was to go long natural gas in 2021. In March 2021, bought the UNG Jan 2022 LEAP call (10 months out) for $0.94. A few weeks later UNG went down to around $9, and the LEAP was losing money. However there has been a nice rally into July 2021. When UNG pulled back from peak around $13 to about $12.60, exited half the position in case this was the “big one” for a pull back. Natural gas is hard to trade because spike up quickly with a nice profit, then be back to break even 2 weeks later. Obviously as soon as the position is halved, the market rallies – but that’s just trading. Some physiological experience trading cryptos is helpful, because the UNG short term trading peaks and troughs can have similar severity (even though the fundamental drivers are obviously massively different).

UNG Year to date 2021 price chart – including trade updates

To get some extra juice in the trade, sold the $15 Aug 2021 calls for $0.20 against the entire position. The high premium for selling a 15% OTM call option was possible due to high IV. This trade is to tempt the market to try and hit a $15 target in only a few weeks, but also to hedge a pull back.

However as the market rallied again past $13 a couple of days later, realized that had made a mistake on being the start of a big sell off. Therefore was looking keep the long position for potentially higher than $15. This may seem like flipping ideas and being too wishy washy. However UNG looks more bullish then expected and resistance at $13 disappeared quickly. Basically would like to maintain a larger position size, but would like to have finger on the exit button. Also since had just made a nice profit selling half the underlying LEAP, we had the “house money” to do another long trade. So in order to maintain long deltas, bought the $15 Sept 2021 calls for $0.42. This made a calendar spread in the $15 Aug/Sept pair for total cost of $0.22. The calendar spread is in addition to the now half position sized underlying LEAP call Jan 2022 $11.

Trading Summary

This was an overview of how to use LEAP calls and short call overlays to trade commodity ETFs. The aim was to maintain a position, take risk off on the way up, and lighten up towards the end of the trend. Another trading update should be done when the current natural gas position is significantly changed or exited.

Uranium Position Trade

In 2020 and early 2021 we have started what will hopefully be a multi year position trade in uranium stocks. A position trade is taking a significant portfolio % trade (up to 10%) on a high conviction trade idea, to hold for several months until the fundamental trend peaks. Commodity trading is notoriously hard to time, because often there are several years in the wilderness, followed by huge peaks in a few months or years, following by equally rapid declines. Therefore some level of trend following is required to avoid having capital tied up unproductively for years.

Trading Products

The uranium sector is relatively niche compared to commodity sectors like oil, natural gas or gold. Historically the uranium sector has been underserved by ETF products, and there are currently only three URA, URNM and NLR. Both URA and URNM are more direct play on the uranium commodity producers, versus NLR that also includes nuclear power related stocks.

NLR will be ignored for this position trade, because it focuses on nuclear industry conglomerates, utilities and only some uranium miners. It trades more like large cap equity and only requires that companies get 50% of their revenue from uranium sector.

URA has been in existence since 2010 and focuses on large and medium cap uranium producers. URNM started trading in Dec 2019 and seems to have been constructed to only allow strict uranium producers. However to achieve this allocation URNM has to hold significantly smaller cap uranium producers and penny stocks that might not make it into other ETFs. For example the 4th highest URNM holding Yellow Cake PLC only has a market cap of $400 million, and with a 8.9% allocation. This makes URNM a more pure play on uranium but will definitely make it more volatile. Some holdings that have less than 5% allocations are penny stocks and will trade accordingly (high peaks, low troughs etc). The URNM ETF allocation is ideal for Uranium producer exposure in one place, but need to understand what it contains and don’t be surprised if it moves very quickly up or down.

This is direct comparison of URA and URNM top ten holdings. 47% of URA is in the top 2 main sector heavyweight stocks, but for URNM this is only around 32%. The URNM holdings are less concentrated in the larger cap firms. URA and URNM also trades LEAP options but they seem to have wide bid/ask spreads, so it appears more efficient to trade the ETF directly.

Credit: ETF compare tool

Cameco (CCJ) is the major North American uranium producer. CCJ is widely covered in research in US and Canada and and is often used as a proxy for the uranium sector. In late 2020 and through out 2021 the sector has broken out above previous multi year resistance. The following chart compares 5 years of historical price performance for ETFs URNM, URA & NLR with Cameco (CCJ) stock. During the last 5 years URNM was listed in Dec 2019 but all others were already trading at least 5 years ago. The relative outperformance of URNM is due to it’s mix of pure uranium producers including penny stocks.

5 year historical performance for 3 Uranium ETFs and 1 major producer.

Completely separately there are actually CME traded Uranium futures but they appear very illiquid and don’t have any option liquidity. Logically futures would seem to be a good way to access the physical uranium market, but they seem to be not be actively traded in any time frame (from near month to one year out). Have not researched why this should be, because many other commodities actively trade on CME futures. Whatever the reason, uranium futures are not useful as a trading vehicle. Anyway if the commodity price increases then uranium producers equity should provide more upside leverage than physical uranium.

Uranium Worldwide

Uranium production takes place in many countries around the world, but has significant concentration in only a few countries. More than half of all identified uranium resources are from only 3 countries. Recoverable “identified resources” means reasonably assured Uranium resources in the ground, plus inferred resources from mine surveys. The following pie chart breakdowns the worldwide percentage of identified uranium resources by country:

Credit: Pie chart was generated in house using raw data from

Traditionally a commodity producing countries Australia have more than a quarter (28%) of world identified uranium resources. However less expected countries like Kazakhstan have major mines and account for 15% of uranium resources. Canada makes up rest of the top 3 countries with 9%. Many other countries make up the remaining half of uranium resources but always in decreasing percentages. The USA only accounts for 1% of world identified uranium resources.

New Uranium Trust

One very significant event in 2021 is the planned US listing by Sprott Asset Management of a new investment trust to own physical uranium. The uranium price has been accessible for 5 years in Canada on the Toronto exchange as Uranium Participation Corporation (TSX: U). However crucially Sprott’s plan is to buy UPC out and change the investment structure to allow a US listing – which will open it up to many investors portfolios.

Quoting (with our italics) : “Industry commentators have suggested that Sprott’s market participation has the potential to transform uranium from a sleepy commodity whose consumers dip into an opaque spot market to supplement their long-term contracts, to a more liquid, transparent and easily investable sector for investors who want exposure to a commodity expected to face increasing demand.”

Sprott has already brought gold (PHYS) and silver (PSLV) to market, so has a good track record in the resource space. The current listing date for new Sprott uranium trust is July 19th 2021.

Uranium doesn’t traditionally have speculative investor demand in the same way as commodities like oil and gold. The spot uranium was historically hard to buy as an institutional or retail investor – either with futures or via a physical trust. Having US listed spot uranium trust could provide organic investment demand as an alternative asset diversifier. There is a large pool of investor funds sloshing around the world looking for returns, so it could land on uranium in the next few years.

The other important item with uranium companies is the relatively small market capitalization of the entire sector. The uranium sector’s current market capitalization is about $30 billion. Any significant in flows into uranium equities could result in this rising significantly. The combination of a new physical trust and equity in flows could translate into wider investor interest in the uranium sector.

Trading Update

The original URNM trade entry was in April 2020 on the rebound from the post covid crash, after the market had decided the world wasn’t ending. The URNM position trade strategy was simply long ETF with no options involved. The ETF spread was relatively wide, so trade entry required working some limit orders to get a decent price – but often URNM would still only fill very close to the ask. e.g. if the bid/ask from $27.65 / $28.00 would only fill at $27.95 even by walking up Buy limit orders in $0.01 increments. URNM is too illiquid to trade regularly.

In Jan 2021 the position was doing well (up about 57%), but did not believe that our position size was big enough for the trade conviction. One thing that we had noticed when analyzing trades from last 2 years (including 2019 and 2020 trades) is that generally not getting paid enough for being right – usually because the position sizing was too small for the portfolio. There were also around 20 to 30 distinct ideas and strategies that were not contributing enough to the bottom line. Decision was made to focus on only 10 to 15 ideas at a time for the trading account, which allows idea quality to improve. This also reduced the time monitoring active positions with the constraints of the day job. When getting significant macro calls correct we are attempting to increase size in 2021 to maximize returns. For example with “long oil in 2021” sometimes the “normal” position sizing was increased from 10 contracts up to 30 contracts. It’s a bit out of the comfort zone because the position sizes are 1 or 2 times bigger. However since we always maintain good risk management – the good calls are still beating the losers so far.

In the spirit of getting out the comfort zone on major trade ideas we decided to pyramid up with 2 extra purchases around $44 each in Jan 2021 to bring up with average price to $39. There was fairly clearly some institutional buying in the last couple of months of 2020. So although adding in Jan 2021 was late after the 30% run up, it appeared we were in good company. Having the initial position from April 2020 allowed us to enter a very bullish trend at full position risk, but still have a 10% downside cushion down to the new average price. The following chart shows where the greater risk was added and how the average purchase price moved up.


This URNM position trade also shows the importance of having some position in trade ideas you care about. Then you will care enough to monitor the position and not miss opportunities to add size. It can be hard to take a brand new position trade in a strongly bullish trending market – even if the trade conviction is high. This trade will be held long term in an IRA and potentially be a multi year hold.

Long Energy in 2021

This outlines the investment thesis for starting and maintaining our long energy position in 2021. This is then followed by implementation of the short selling put strategy on XLE energy sector ETF. Selling XLE puts has been an effective strategy in the first half of 2021, however the year started with quite a bit of uncertainty in energy sector. Fortunately the uncertainty provided “fear” in the option premiums, so running a strategy that benefits from high volatility makes sense. Also covered is why some potential XLE trading strategies were rejected due to the higher volatility.

Pricing note: Unless otherwise stated XLE prices are weekly closing prices, not daily close or extreme high/lows intraday.

Investment Thesis

In the previous year 2020 there had already been one huge XLE sell off into the Covid crisis low, which was ultimately hit at $25.86 on 20th March 2020.
Then followed by a 5th June peak around $44.84 within 2.5 months. This was then followed with a steady fall back to $28.72 on 30th Oct 2020.
The year 2020 ended with a very steep 32% rally in the last two months, ultimately ending at $37.90 on 31st Dec 2020. XLE was trending bullish or bearish in either direction for a few months, but then would reverse direction and trend in the opposite way for a few months. This meant that the energy outlook was somewhat uncertain – specifically investors were taken by surprise with Oct 2020 nearly revisiting the March covid low. This 5 year chart shows the context:

On a multi decade chart XLE is also at the bottom of the trading range. The main bearish case for oil producers in the energy sector is that fossil fuels are a dying industry that is destined to be replaced by alternative energy such as wind or solar. This maybe true on a 10 to 20 year time horizon looking towards 2030 and 2040. However energy is cheaper enough on an absolute basis to take a tradable medium term 2 to 5 years position. XLE is trading at the same price as 15 years ago – obviously XLE has paid significant dividends since 2005 so that isn’t a zero percent return – but it is clearly “cheap” based on historical pricing.

Obviously looking at price only does not necessarily make a sector relative good value, so looking at historical price to earnings ratio is another well used metric. One such price to earnings ratio is the Cyclically Adjusted Price-to-Earnings or CAPE for short. CAPE is defined as a valuation measure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle. Looking at the energy sector CAPE shows relatively cheap valuation in 2020 with two annual reading of around 11 (18.42), rebounding to 18.42 as of first half of 2021. This is significantly cheaper than all other S&P sectors in the table below.

Also the percentage of energy sector in the S&P 500 is 2.53% as of July 2020. This will have increased in 2021 due to energy sector rally, but the percentage size compared to other sectors is still historically low. This reflects the energy sector issues, but is small enough allocation that if only some investor capital flows back into energy the sector could grow quickly. This is not an argument for it returning to 20% of the S & P 500 – only that an investor sentiment could see it rally quickly because it’s absolute base is relatively low.

For the full sector chart with all sector percentages – see visual capitalist .

Trading Strategy

All of this historical bearish price action did generate some good option premiums to sell into 2021. Even though XLE has been rallying in 2021, volatility has been high due to the constant threat of a significant sell off.

For other trading positions we’d often use deep in the money LEAP calls and selling shorter term calls to start a new position. That trading strategy often works best on growth stocks or commodities with zero dividends. However XLE isn’t currently a great candidate for that because of the dividend yield, and higher volatility on the long term LEAP calls. Other option trading considerations come into play with higher dividend stocks like XLE – stocks that don’t pay dividends have less chance of having ITM short calls being exercised on you as the contract owner takes the stock to capture dividends. Also overpaying for longer term LEAP calls in high volatility can be a problem if they were purchased with a lot of time value. Generally it is better to start the deep in the money LEAP and overwriting when volatility is lower. XLE isn’t currently a great candidate for that because of the dividend yield, and higher volatility on the long term LEAP calls.

Due the significant sell off XLE had a dividend in 2020 that moved around in the 4% to 5% range depending on price extremes – so buying the stock outright or selling puts to capture the dividend looked like a good approach. Since the energy sector was in play so much, put option premiums generate some significant put premium volatility. Given the combination of high volatility and excellent dividends, selling put options seemed like the best choice. See this historical volatility chart for the trailing 12 months from July 2020 to July 2021, showing the significant volatility spikes in first half of 2021:

It’s hard to time perfectly, but selling puts should generate monthly premium, and worse case secure a stock position in high dividend stock. The risk of selling puts at lower prices (on stock that you want to own long term) is that XLE runs away to the upside too fast, and the opportunity to own stock at a good yield is gone. Ideally would like avoid XLE running away to the upside and having to chase the market to “avoid missing out”. The ideal market for selling puts is one with a bullish or flat bias, with high option premium. Over a number of months, this is a balancing act to sell without the probability of being assigned. Part of the art is to sell options at higher and higher strikes every month, but not so high that when the market reverses at the top all profit is given back on one “bad” put. Selling put with XLE in the range of $40 to $48 out 45 to 60 days to expiration was done in early months of 2021 – but as the market went over $50 the strategy reverted to longer dated 90 day options at strikes in the $45 to $48 range. No put option was ever sold over $48 even though the market went as high as $55.

The red lines on the chart below show where the puts were sold. The start of a line is an opening position (sell to open), the end of a line is a closing position (buy to close) and the price level of the line gives the $ strike. Shorter lines indicate holding periods of 30 to 45 days, and longer lines indicate 60 to 90 days.

Each red line is trade of 10 contracts. Sometimes the risk was tripled up, with a maximum risk of 3 x 10 contracts = 30 contracts. During April 2021 there was theoretically a risk of ($45 x 10 contracts) + ($46 x 10 contracts) ($48 x 10 contracts) of about $139k (minus put premiums sold).However this was only done in rising markets when the older puts were nearly worthless. There was a theoretical risk of 30 contracts, but looking at probabilities the $45 and $46 strikes only had a delta of less than 10 (so had a greater than 90% of expiring out of the money). Also if the market suddenly turned very quickly they could simply be bought back to reduce risk. If there was a flash crash (e.g. a daily move from $50 to $40) then all 30 contracts would have gone in the money – but that volatility was unlikely according to the options pricing. A flash crash “could” have happened but it seemed worth the risk, as it was a very low probability event and the trade was working.

Although at the end of April the final put did get closer to assignment and the market was now trending down. Therefore made the trading decision to go back to 10 contracts only (1 red line) and keep further out of the money. There were still some decent premiums to be had into May because of the increased volatility. As XLE moved higher into May and June moved some of the strikes up because the market was trending upwards, and was ok to double up contract exposure (have 2 red lines or 20 open contracts).

Ended up taking on more risk in a bullish market while the XLE trend was up, but pulling back contract size when XLE was moving down (due to rapid sell off risk). Importantly “risk” here is a relative concept compared to buying XLE outright. Most puts were sold with a 35 delta or lower – which means that on trade entry they have about a 2 in 3 chance (65% or higher) of expiring worthless (making money) at expiration. So they mathematically have an edge of winning each trade, and can typically tolerate at least a $2 to $3 XLE pullback without losing. There is risk here, but XLE has to surprise rapidly on the downside and there are adjustments that could be made should that happen. Worse case end up with a dividend paying stock at a reduce price.

The selling puts trading strategy does have issues if XLE is chased higher and puts are just sold mechanically without regard for price in low volatility. Option volatility tends to decrease in rising markets, so selling near month options at the top of multi month uptrend is not ideal. For example, selling shorter term 45 day to expiration put options at $55 on a market that has just gone from $45 to $55 in a month can be asking for trouble. If that option is sold in lower volatility for $1 but has to be bought back at $4 in the higher volatility of a declining market – then that is $3 of lost premiums. That could be giving back 3 months of premium profits in a few days. It’s not “free” money, it’s money for taking risk and always need to respect the market’s ability to reverse. Market tend to reverse faster than they increase (“stock take the stairs up, but the elevator down”) – which is why the short put premium exists in the first place. Or those who prefer a more dramatic interpretation from the 1800s can always quote “He who sells what isn’t his’n, Must buy it back or go to prison”. Technically short puts are cash secured, but the short selling warning still stands – selling more put contracts than you can cover can be painful.

Margin Requirements

The short put strategy can require keeping the entire cash amount available to cover the short put liability (should the stock be “put” on a price decline). In accounts such as an IRA that require a cash secured put the full amount of cash needs to be available. In a margin account you are still liable to buy the stock back – for example consider 10 short put contracts on XLE at $40 strike that expires in 45 days. If XLE went to $0 (zero) in 45 days you would be required to buy $40k stock. However a broker typically only requires about $8k to $10k margin for a 10 contract short put option in the price ranges of $40 to $50 – even though the theoretical value of the stock position is in the $40k to $50k. The exact margin calculation requirements will move daily with strike price and stock volatility. The return on margin is a fantastic investment return if run successfully each month e.g. For 10 short puts assume $10k margin to sell a $1 option held for 45 days. Assuming $1 option profit every time, and run it about 8 times a year (365 calendar days / 45 calendar day option holding period) and then dividing by the same $10k margin used every time = about 81% annual return on margin. Note that % annual return is theoretical maximum return assuming all puts expired worthless – achieving half of that would be an excellent trading year.

Trading Summary

In summary, selling XLE puts has worked well for last 7 months and using margin can help juice returns. The strategy worked well because XLE went up or sideways and energy markets still had high volatility. However it is important to manage the risk and respect the power of the market by not fighting significant down moves. Recognizing down trends and adjusting position size to reduce risk are important for selling puts. The current plan is to maintain this working trade for the rest of 2021, but could re-evaluate anytime.

Credits: Oilfield Pump (Texas) image used at the top of this page was created by Jcutrer photos. All other credits are referenced inline.

Long Gold calls into 2023

Despite threatening to breakout to new highs in August 2020, the gold price in July 2021 is actually about the same as one year previous in July 2020.

While the Gold price has moved around in a range for the last year, the volatility in the Gold market has been steadily declining this year. This steady decline in volatility is arguably surprising given all the macro economic fallout from the Covid stimulus and other economic measures. However the Gold market appears to be predicting less pronounced moves, at least in the short to medium term.

Since there is low gold volatility we can take more time premium risk than usual and keep the call strike relatively close to the money. Using deep in the money call options is a favorite strategy to get leverage to an underlying without taking the same principal risk as long stock. Buying in the money call options typically means that the majority of the option premium is intrinsic value (“real” value not time value). However the time value of an ITM call option can still be much cheaper when the underlying volatility is low. The spread will also benefit if Gold volatility increases during trade, which is a possibility given volatility tends to be mean reverting.

Gold LEAP diagonal spread

Therefore we can take advantage some of the lowest gold volatility this year, and buy a very long dated LEAP call for Jan 2023 (with a 66 delta). Buying 10 GLD options is approximately the same size as a single call option on a /GC futures contract (obviously assuming similar strikes and expiration dates).

To try and pay for some commissions on the larger trade and get a small amount of income, the shorted dated Sept 2021 $190 call option will be sold (7 delta). This option has a 93% chance of expiring worthless at Sept expiration (100 delta minus 7 delta). But also a 14% chance of being touched between now and expiration (“double the delta”). Using the shorter dated short call does chip away at the cost basis every month. However it does mean that would likely have to roll and re-evaluate position if GLD price shoots up more than 10% in a couple of months – from todays close price $171 to $190 in September.

As of close on July 14th this gives the spread a long delta of approximately 58 delta. The long dollar amount for 10 contracts gives about $99,180 equivalent gold exposure (specifically $171.04 GLD price x 1000 shares x 0.58 spread delta). The long call Jan 2023 call is $19.85 and the short Sept 2021 call was $0.42, giving a maximum risk is $19,430 until Jan 2023 in approximately 18 months time. The maximum risk amount is calculated by (long 10 contracts x 100 x $19.85) + (short -10 contracts x 100 x $0.42) = $19,850 – $420 = $19,430. However there is plenty of time to adjust between now and Jan 2023, so the likelihood of realizing the full loss is low.

Trade Date
Trans Type
Sell to Open Short Call
Call GLD 190.00  EXP 17-Sept-2021
Buy to Open Long Call
Call GLD 160.00  EXP 20-Jan-2023
$ 19,430

Importantly if GLD goes over $180 the Jan 2023 $160 will over its breakeven price, and will begin to trade more like an underlying stock position as the option delta moves towards 100. The call option leverage allows paying less than $20k to control a $100k gold position. The long dated call also reduces the risk in a protracted gold sell off. Giving time to adjust and roll as conditions warrant (e.g. higher volatility) or gold price opinion changes (e.g. gold price declines and would like to exit to maintain some option value for other trades).

In summary this is a leveraged gold long position as a portfolio "hedge" to avoid "missing out" on a run away gold price. It gives plenty of time for the idea to play out. Additionally the capital efficiency of LEAP calls manages the downside risk, but gives a significant upside potential if Gold moves up in next 18 months.

Bitcoin Fund Portfolio Rebalancing

This trade adjustment on European based Bitcoin fund SE:BITCOIN.XBT describes reducing bitcoin exposure inside a “speculative” trading IRA. The main reasons for selling the bitcoin fund are portfolio rebalancing, mitigating long term provider risk and high product expense fees.

Portfolio Rebalancing

This trade has been a multi year Bitcoin long, trading two Bitcoin tracker fund products GBTC and SE:BITCOIN.XBT. Both funds aim to track the Bitcoin price (BTC), and own a claim on underlying Bitcoin. For brevity the underlying Bitcoin owned by either fund will be referred to as the Net Asset Value (“NAV”). As a quick review GBTC is Grayscale’s well known investment trust whose price is tied to Bitcoin. The initial GBTC position was originally purchased in March 2017 with BTC at $1,250 – see initial trade entry for more background.

However in 2018 due to GBTC having a very high premium to the actual underlying bitcoin holdings (NAV), it became very unattractive as a long term holding. Therefore the entire GBTC position was replaced with a more obscure Bitcoin fund SE:BITCOIN.XBT traded in Swedish Krona on the Swedish stock exchange. The fund historically tracks the Bitcoin price much more accurately than GBTC with only a nominal premium to NAV. Bloomberg has average 52 week trailing NAV of -0.12% for SE:BITCOIN.XBT, but a whooping 18.22% for GBTC (as of Feb 4th 2021). Incredibly around year end 2017 and into 2018 the average 52 week trailing NAV premium was 53% for GBTC (on 16th Feb 2018) and occasionally spiked over 90%

GBTC was sold in Feb 2018 due to this huge premium to NAV – see the original trade exit for a detailed discussion. The final sale value contained NAV (the equivalent amount of Bitcoin held by the fund) and the premium (that the market assigned over fair market value for the Bitcoin held in the fund). The NAV amount was then reinvested into crypto with approximately two thirds in Bitcoin (SE:BITCOIN.XBT) and one third in Ethereum (SE:ETHEREUM.XBT). That maintained exactly the same amount of crypto holdings, but with some crypto diversification and greatly reduced exposure to fund premium. The premium part of the sale was “taking money off the table” and was invested into other portfolio assets. This crypto rebalancing trade was done at approximately BTC $10,025. All these trades were IRA eligible so rebalancing was not a taxable event. Rebalancing these XBT funds frequently would not be advised because of the wide trading spreads and international transaction fees. 

Fast forward 3 years to Jan 2021. Crypto prices have gone through a huge decline (a “crypto winter”) from about Dec 2017 to Dec 2018 – with BTC ultimately reaching a low of $3,300 around Dec 2018. Then came the recovery rally from Dec 2018 to Sept 2020 with BTC reclaiming $10,000. Following that Bitcoin has been on a rocket ship launch starting in Oct 2020 at approximately $10,600 about to a high in early Jan 2021 of $40,405. The latest boom is claimed to be institutional money buying in large tranches, chasing exposure for themselves or their clients.

In Feb 2018 felt like we hung around at the party too long, with BTC moving from a peak around $20,000 in Dec 2017 down to our rebalancing trade at $10,025. Were actually saved somewhat by being able to the capture the GBTC premium. So this time we decided to see if we can improve by selling near the top of a huge peak, not waiting for post peak decline (speculation of course). Therefore during decline from high in early Jan 2021, exited two thirds of Bitcoin SE:BITCOIN.XBT position on 20th Jan when BTC was approximately $35,105 (about 13% from peak a few days earlier).

Ethereum (SE:ETHEREUM.XBT) position was maintained with no reallocation. Even after allocation the speculative IRA portfolio still has 25% crypto exposure, of which approximately 60% is Bitcoin and 40% Ethereum. 

Provider Risk and Fees

Any crypto exchange traded product (such as GBTC or SE:BITCOIN.XBT) has some significant counterparty risk if held for several years. Fund could get hacked, the provider may lose private keys or have some other internal company disaster that impacts the underlying crypto holdings. There is also significant provider discretion about how to handle hard forks and how (or whether) they accrue that value back to fund holders. Bluntly there is a constant tail risk that one day investors lose some or all of their investment in a crypto fund (potentially overnight with no warning). Ironically holding these crypto funds puts a single point of failure back on to the provider – that the underlying crypto “trustless” philosophy was supposed to resolve.

Both crypto funds have very high management fees that mimic hedge fund style management fees. GBTC has 2.0% management fee (but higher NAV premium) and SE:BITCOIN.XBT management fee 2.5% (0.5% higher, but less NAV premium). Although crypto funds may be able to justify high fees due to the very specialized product, this has to be a long term holding concern – especially given industry trend towards much lower fees. As any crypto fund position size grows, the management fee becomes much more expensive annually in absolute real $ amounts. Investor alternatives to paying crypto funds management fees are managing their own crypto keys in cold storage. Cold storage approach has no management fee, but requires investor have a detailed crypto knowledge of potential multiple cryptos. An investor needs to balance no management fee in cold storage, with the possibility losing their investment due to their own mismanagement. Therefore the fund management fee is an expensive convenience fee to trade crypto on exchange, manage crypto in cold storage and implement security protocols.  

Investors can currently ignore high fees because crypto is currently trading on Fear Of Missing Out (FOMO) momentum – who cares about 2.5% fees when you make 300% plus per year? However through down markets over years or months, the fees begins chip away at long term value. The Nerdwallet Mutual Fund calculator can be used to compares product fees for an initial $10,000 investment in the (clearly hypothetical!) scenario where BTC price is static. Example shows that with no BTC price appreciation simply holding SE:BITCOIN.XBT with its 2.5% management fees loses nearly 12% in fees over 5 years – just for holding.

This clearly shows the impact of high management fees on long term holdings – these funds can only be held if high confidence crypto will rise. However as a medium term trading vehicle for crypto exposure with no taxable gains in an IRA, it is well worth these risks. Just remember to periodically take some off the table to mitigate the provider and management fee risks. 


GBTC and SE:BITCOIN.XBT products are a good trading proxies for crypto, but are still third party representations of a “promise to pay”. If you don’t have your own private keys, you don’t truly own your crypto. Crypto funds should not be relied on for multiple year long term buy and hold crypto exposure. Only crypto in cold storage does that. 

The crypto asset class is incredibly hard to hold without taking at least some money off the table on the highs. The peak to trough declines were about 85% for BTC and 94% for ETH from Dec 2017 peak to Dec 2018 trough. Unless some house money was already taken off the table in Feb 2018, it is doubtful that would have held all the way through “crypto winter” without finding the need to “do something”.

There is a reasonable chance that BTC goes significantly higher – however there are better asset classes that are less frothy starting from a lower base. BTC can potentially move from $35,000 to $100,000 from high (e.g. 200% return) but there are better opportunities to redeploy some of that crypto capital. Selling some for portfolio allocation is not the same as being bearish on crypto. This speculative IRA portfolio still has 25% crypto exposure, because it is the gift that keeps on giving. However if/when the crypto music stops, we will have made enough to construct an entire new portfolio from one single original Bitcoin position – whatever happens to BTC in future.


COVID-19 Coronavirus Portfolio

This is a COVID-19 coronavirus portfolio of trading ideas generated in the last two months. The portfolio aim is to identify and invest in new trends in commodities or sector ETFs generated by either government policy monetary policy response or “shelter in place” lockdowns.

Covid-19 coronavirus portfolio - world map - 20200416

This collection of trading ideas was setup somewhat quickly as a tactical portfolio in response to the COVID-19 Corona Virus situation. The fundamental portfolio theme is that the market has been almost instantly split into winners and losers, Some industries have simply been decimated overnight that they can’t function as viable businesses for the immediate future. For example, even Warren Buffet completely sold all Berkshire Hathaway’s US airlines in April 2020. The aim of this tactical portfolio is to think about trading ideas that can generate winners in the “new normal”.

COVID-19 coronavirus portfolio – Option Volatility

Volatility is very high in most commodities and sectors, so it is critical to use option trading strategies for high volatility environments. Specifically Implied Volatility Rank (IVR) is in the range of 75% to 100% for many ETFs this month. Simple one leg option strategies such as buying out of the money calls in high volatility products will likely not do well. The “go to” trade on ETF options has typically been to buy long dated deep in the calls (LEAPs greater than 9 months out). This means that the majority of premium paid is intrinsic not extrinsic (time) value – the extrinsic value will likely reduce over the course of several months as the current volatility premium likely goes lower. To help with any downside, call spread overwriting and put butterflies on the same ETFs. There was also call spread overwriting in major tech indexes to hedge some downside in tech ETFs that do not have any options. Where no ETF options were available, actual ETF equity positions were taken, but sized appropriately at less than 10% of portfolio size.

COVID-19 coronavirus portfolio – Trade Ideas

The exact thinking behind the ideas need more detailed separate blog posts to fully justify their inclusion. However this tactical portfolio blog post is just to give the trade ideas, their high level implementation and any hedging strategy. This following ideas show the sector, idea rating (buy/hold/sell), the conviction level (low/medium/high) and a high level idea description.

New trades with “Buy” where started in the last 45 days. If a “Hold” is included in this portfolio that means it was already owned, but think performance would improve because of COVID-19 Corona Virus environment. The aim would be to hold most of these for 2020, or until stopped out.

Each paragraph describes a trade idea within a sector (including trade direction), rating (Buy/Hold/Sell) and overall conviction level.

Real Estate and Liquidity

Real Estate (Long). Hold/Buy. Medium. Select international opportunities mostly due to strong USD creating weaker local currencies and lower prices on local real estate. Here “local” means local to a target country in question, specifically Canada and UK whose currencies have been beaten up quite a bit due to flight to safety buying of USD. Keeping liquid in USD to maybe a currency conversion later in 2020 for a property purchase. Not rushing into anything. Actively writing a new Ebook for US investors on future opportunities with international real estate in 2020 and beyond.


Gold (Long). Buy. High. Gold is one of the best performing assets YTD in USD, and rebounded very quickly with after an initial March 2020 sell offs. The rebound was a direct response to the FED stimulus packages for the general economy. Gold is trading at 7 year highs in USD (near $1700) but importantly gold has made already made new all time highs in just about every other major currency such as Euro, UK Pounds, Canadian Dollars (etc). Select currency and 20 years on this Bullion Vault to chart historical gold price in each currency. Bought deep in the money calls on physical gold ETF (GLD) with an approximately 90 delta for Jan 2022. Aim is maintain a gold position, to ultimately replace with some actual physical gold, when the current spot to physical price premium subside. Aside from just the physical metal, gold miners should benefit from lower oil prices and therefore have reduced input costs, that should increase earnings per share in 2020 and beyond. Gold miners are up about 30% since purchase of Jan 2021 deep in the money calls in both major (GDX) and juniors (GDXJ). These are potentially multi year longs.

Silver (Long). Buy. High. The gold/silver ratio is at about 113 which means that silver is historically very undervalued compared to gold. Interestingly the silver price is approximately tracked the Dow (DIA) year to date, being down about 15% – so it does have more of an industrial market supply and demand component. Gold tends to function as a true safe haven, but silver can influenced by industrial supply and demand from economic conditions. Silver can definitely sell off in a general market downturn, where as gold is holding its value better. However if there is to be a significant gold bull market, silver will tag along for the ride, but may take more time to turn around. Trade was bought physical silver and silver metal (SLV). Bought deep in the money calls with an approximately 85 delta for Jan 2021.

Uranium mining stocks (Long). Potental new uranium bull market for 2020s. Uranium producers and explorer stocks have been one of best performing sector and are up YTD – beating general indexes. Uranium equity could definitely get caught in a wide market downtown, but has tracked higher physical uranium prices that have increased from low $20 to $32 in last month. Ideally this is a very specific sector mining play that should be a play on the physical price of uranium, and should not be correlated to the general market. We play this with a small position in a very small ($4 million market cap!) and brand new ETF of uranium producers URNM. This could be a multi year trade, but the risk reward setup seems good.


Oil drillers (Long, short vol). Buy. High. Added new full size positions in OIH. Made bullish call last month on OIH was trading at around $4. In OIH sold cash secured $3 puts in July 2020 and Sept 2020, because the implied volatiliy was insane (over 100%), and combined with half a position in long OIH stock. This position bounced nicely, so bought back the short puts for good profit, then hedged the remaining stock with a wide put bufferfly in July 2020. Sold 40% out of the money call in July 2020 to help finance the put butterfly a bit. This is neutral to long ish bias on OIH until July, but it has run up a lot in April so it is sells off in May (seems likely to take a break) then the put buttefly will make some good money, even if the OIH stock loses money. Note that OIH has had a 20:1 reverse split this month, so the $ option strikes mentioned above will need to be multipled by 20 to compare to a current OIH chart.

Oil explorers (Long, short vol). Buy. High. Added new full size position last month on XOP (same timing as OIH trade). Bought a deep in the money for Jan 2021, then overwrite with call spread for May 2020. The call spread recently had both legs in the money and was only 2 weeks to go to expiration. Therefore overwritten call spread was rolled to Jun 2020 for a minor debt. The aim is to maintain the deep in the money Jan 2021 call, and keep overwriting for the rest of the year. If XOP goes up a lot we will capture majority of move. If stays same we can get some income from the high volatility in the call spreads (if they expire worthless). If goes down we will lose, but much less than stock. One advantage is if XOP price goes down fast the implied volality will go up, and so the deep in the money call will stay bid. Note that XOP has had a 4:1 reverse split this month, so the $ option strikes mentioned above will need to be multipled by 4 to compare to a current XOP chart.

Natural Gas (Slightly long, short vol). Hold. Medium. The natural gas etf (UNG) is hard to hold long stock for several months, due to the current contango in natural gas futures. Contango is when near month natural gas futures trade lower than far month future prices. (UNG) maintains its natural gas price exposure by constantly rolling contracts – specifically buying more expensive far month futures contracts, by selling the expiring (and cheaper) near month contract. This enforced rolling built into the product, creates a long term drag on prices while natural gas is in contango (look at any multi year chart of UNG). This is a less extreme version of the same problem with USO contango this week – when the oil price went negative (!). Since owning (UNG) stock is not a good idea, the setup is usually buy a long term calendar call spread, and also selling near dated call spreads on (UNG). This takes advantage of high implied volatility with limited risk, but can still benefit if prices are higher or neutral. This does sacrifice large profits if (UNG) spikes higher quickly and cannot roll fast enough into the price increase.

Natural Gas Producers (Long). Buy. Medium. US natural gas equities have been beaten up in 2020. Clearly there are is a huge over supply of natural gas and a massive worldwide demand shock for energy. (FCG) tracks an equal-weighted index of US companies that derive a substantial portion of their revenue from the exploration & production of natural gas. Approximately 15% of its portfolio is in MLPs and the remaining 85% to equities. Interestingly the (FCG) attempts to recovers some of its 0.6% management fee by securities lending, and it does have a dividend yield but that will likely disappear to much smaller amount in 2020. However to place this in some historical context, many US natural gas equities are trading at the lowest price for 20 years. For example, buying natural gas producers index (FCG) for $5.50, when its all time high is about $155 in July 2008. The US natural gas producers sector at these prices is low enough to be a binary trade. Either the majority of the US energy complex is going bankrupt and this is a slow grind lower for many years (“lose”). Alternatively some energy demand returns, the survivors consolidate and a restructured sector operates at higher price levels at some point in the next few years (“win”).


Cloud Computing (Long). Buy. Medium. More e-business activity (e.g. Shopify) for starting new businesses and tools for people working for home. This is long equity ETF but focusing on cloud technology (CLOU). Actively trying to ignore struggling parts of economy (e.g. airlines, manufacturing, automative, consumer financing etc). Positions in CLOU and other tech ETFs will be actively hedged with QQQ OTM call spreads.

Mortgage REITs (Long). Buy. Medium. MReits were trading at significant discounts to book value in April 2020 This was definitely a speculative buy with high yields around 11%, especially because dividends could be heavily reduced in next year. However if MReits can simply maintain their value, and allowed to DRIP for a number of years (even at these levels), then they can add some welcome yield and maybe some capital appreciation. MReit ETF (MORT) is a high yield trade great for a portfolio position in an IRA, because it can be allowed to DRIP long term. This is relatively risky play, and only medium conviction. There is no simple way to hedge this using options, so will only take a half position size to manage the risk.

Solar ETF (Neutral). Sold. Medium. Fortunate enough to sell Solar ETF (TAN) around $34 after the bounce back up to $37 in early March 2020 (not the top, but about 20% off the high the way down). This was a risk off trade, which preserved some capital initiate some of the other new ideas in this portfolio.

Emerging Market Equity (Short). Buy. High. Emerging market companies that have debt denominated could have a hard time paying it back, with economic shutdown and currencies depreciating against USD. Emerging market equity like Brazil (EWZ), Mexico (EWW) and India (INDA) have not bounced back as fast as the main US equity markets. For example Brazil has traded in an approximate range of $21 to $26 over last month, down from a Feb 2020 peak of (this is a “L” market chart, not the “V” market chart). Two trades here were 1) out of the money Long Put EWZ butterfly in May 2020, fully financed with short call spread on India market (INDA). This was neutral to bearish. 2) in the money Long Put EWZ butterfly in May 2020 for a debit, and no short call spread. This was more bearish. Brazil equity market has proven to be weaken than India in April 2020 so that seems like a good trade choice approaching May 15th 2020 expiration. INDA trade should expire worthless. Brazil trade already in the money and likely to still be there closer to expiration.

High Yield Corporate Debt (Short). Buy. High, now Medium. Corporate credit quality is being impacted by an unknown amount due to corona virus shutdowns, so that uncertainty would cause high yield corporate bond ETFs to trade significantly lower in the next couple of months. Entered an in the money (ITM) put butterfly as a limited risk reward way to short high yield bond ETF (HYG) on 17th March. HYG was at about $77 then went down 10% in a hurry to around $70. The risk was managed with the limited risk trade structure of an ITM put butterfly, but still got “taken to the cleaners” by the announcement that the FED would be buying junk corporate bonds. This policy announcement caused a huge HYG rally in April from about $70 to $80. Unless there are signs a sharp move down in high yield this week, it will be closed this week approximately 10 days before 15th May expiration – losing about two thirds of original trade capital this week. This is to preserve one third of the remaining principal from a losing trade, as a put butterfly that is now out of the money will decay much faster into expiration. A classic example of a good initially profitable good trade entered for the right reasons, but taken out by unprecedented policy decision. Trade was a loser, but have successfully managed the short risk by not having an unlimited short risk trade on.


Cryptocurrency (Long). Hold. High. Bitcoin (BTC) and other alt coins (e.g. XMR). Holding not adding any more.

Liquidity and Hedging

Peer to peer lending – Lending Club (Neutral). Sell/Hold. High. Already dialed back risk here several years ago due to lending club management issues. However this month turned off auto re-investment of cash into new notes. Definitely do not want any more exposure to consumer credit for next year or so. Peer to peer is a small position, but turning off re-investment seems prudent until can figure out what is going with the general consumer lending (does not look good in short or medium term).

Cash (Long). High. Long USD for investment opportunities and saving up to get properties with low LTV. On existing international property businesses we are looking to open small home equity line of credits on properties with low LTVs in local currency (assuming local bank allows it). A small amount of debt exposure in local currency is effectively a long USD position (since we are based in USD). If the local currency for a country where we own property declines significantly we may consider paying down mortgage principal from USD cash.

Hedges (short, combined with underlying positions). Buy. High. Index call spreads overwriting out about 2 months. similar idea to covered covered calls, but with limited risk reward so that if the market does go massively higher are not losing so much (and can probably roll out of it in following months). Selectively combining put butterflies with hedges.

COVID-19 coronavirus portfolio – Summary

This tactical portfolio was created relatively quickly. The main themes were long metals and energy, with some technology and potentially some real estate later in the year. There are also some relatively aggressive hedging and other complimentary short positions. This is a long/short portfolio, that would be much more heavily hedged if world goes “risk off” again. Having good entry points in April 2020 should definitely help holding positions for longer term. The other main theme is keeping very liquid and not over allocating to make sure money is available for opportunities. In summary, only trade if you want to, not because you have to.

Emerging Markets Iron Condor

This is another bread and butter trade with an emerging markets iron condor, going out a bit further in time to October with 78 days to expiration (DTE). Emerging Markets ETF EEM has sold off rapidly due to market tariff and rate cut talk this week, which has provided inflated volatiliy. This is a limited risk range bound trade for EEM with the expectation that the market maintains its position over the next two months and that volatility contracts.

Trade entry Emerging Markets Iron Condor

Here is the trade entry for EEM iron condor:

Contracts  Expiry Date  Strike   Price   Amount   Trade
+5         Oct 18 2019  45.00  C $0.05   $ 52.69  Buy to Open
-5         Oct 18 2019  42.00  C $0.74  -$372.25  Sell to Open
-5         Oct 18 2019  38.50  P $0.76  -$317.20  Sell to Open
+5         Oct 18 2019  35.50  P $0.35   $122.79  Buy to Open
Total    	                        -$513.97 (credit)

On trade entry on 2nd August there were 78 Days to expiration DTE through to option expiration on 18th Oct. According to the 30 day rule this means that can consider exiting the trade on or after 2nd Sept. On 2nd Sept this would still leave approximately 48 calendar DTE, so there is plenty of time to adjust or exit. The following table sounds the future trade lifecycle dates when trade exit or trade adjustments could be optionally applied:

Trade Lifecycle for EEM Iron Condor

Trade DateTrade Lifecycle (Optional)Days to Expiration
2nd August 2019Trade Entry - enter Iron Condor according to original trade above78
2nd September 2019(Trade Exit) - optional earliest possible date for a full trade exit according to 30 day rule.48 to 1
13th September 2019(Trade Adjustment) - latest possible date to do a trade adjustment using the same Oct options (trade adjustments must be at least 30 DTE)78 to 30
18th October 2019Trade Exit - latest possible date to exit original Iron Condor with any optional trade adjustments that were added.1
Note: Trade Lifecycle actions that are optional are in brackets like this (Trade Adjustment) or (Trade Exit).

The option deltas sold on each side are approximately 35% on the call and 25% on the put, so there is approximately a 70% chance that the call will be touched, and a 50% chance that the put will be touched anytime between now and Oct expiration. Therefore it is likely that the short options at $42 and $38.5 will be tested at some point on this trade, but it can be held due to the limited risk. The breakeven points of $43 and $37.5 are at the high and low ends respectively of the trading range price action for the last year, so we can be reasonably confident that at some point in the next couple of months EEM could return to the the middle of this range – even if there is likely to be some short term volatility, possibly with the short options being touched.

Trade Summary

The aim will be to close the trade for a $100 to $250 profit after 30 calendar days have elapsed, but this could require being patient and waiting for volatility to come in a bit and the trade to move back into the middle of the range around the $40 mark.