insights from a moontower.ai user

I had a long chat with a user who’s been trading as a primary means of income for over a decade. I was deeply impressed to watch how this individual followed the recipe we lay out in The Moontower Mission Plan while incorporating their own spice.

How they combine “volatility lens” with “directional bias”

1. Uses the Dashboard to find a name and term where the volatility stands out as cheap or expensive
2. Then checks if the stock is near an extreme (using technical indicators they’ve tuned over time)
   1. Employs contrarian/reversion delta bias + volatility bias to spark a trade (e.g., if at the low end of range and volatility is cheap, buy volatility with bullish bias—i.e., calls, depending on where skew might prescribe, or sell puts if volatility is high).
   2. If the stock is in “no man’s land,” then does nothing.

Notes on the user’s activity and some feedback I offered:

• Primary tool is DASHBOARD.
• There’s a trade to do every few days, but the practice of stepping through the progression daily every morning has built up a memory. This primes action when the situation sets up.
• Sometimes looking for the cheapest source of beta — inexpensive ETF options or cheap options in single stocks that have a large weight in an index.
  • Gave a recent example of this. User bought options that looked cheap to get long. The directional bias worked and it was a profitable trade BUT volatility got smashed so won less on the calls than expected (another way to frame that is the option behaved on a smaller delta than you expected)
  • As volatility fell even further from low levels, I explained how it’s possible to monetize the delta (ie directional) victory while taking advantage of the even more attractive volatility by buying puts or rolling—selling the calls and, if still bullish, buying 2 OTM calls. You can be more creative but these are just a few ideas. You can use a combination of your directional bias and surface metrics like skew to pick strikes

Finally, an important point that is a bit harder to internalize outside of professional trading contexts.

Just because a vol looked cheap earlier and got cheaper doesn’t mean it’s still cheap!

Why?

Because it depends on what the rest of the “blob” did.

If the rest of the universe saw vols dive even faster you might actually think the vol you own is now expensive.

This is why you don’t think about the history of trades. It’s no longer relevant that it used to be cheap. Now it might be expensive. There should be zero notion of “taking profits” or “locking in a loss”.

It’s always day zero (to use a Bezos-ism out of context. )

Euan and Andrew have an adjacent riff about this in Retail Option Trading. Note how p/l is not a factor in deciding to trade!

The thinking below is exactly how I thought about my trading portfolio and how I think today about my personal portfolio.

Actually, this way of thinking is so ingrained it’s one of those “curse of knowledge” things where I don’t realize that beginners don’t see this as obvious. (And it’s not obvious — you learn it which is what this is all about).

Stop thinking in terms of shares or options. Think in terms of risk exposures. Don’t anchor yourself to the fact that you own 1,000 shares. Instead, think of it as having 10% of your portfolio in that stock.

Always have a target portfolio allocation. For example, based on some analysis, you decide you want to have 10% of your $1,000 portfolio in Stock A. Now the stock doubles and the allocation goes to $200/$1,100 or 18.2%. This doesn’t match what you want, so sell $90 worth to get the allocation back to $110/$1,100 or 10%.

Don’t get hung up on terms like “taking profits,” “letting profits run,” or “looking for an exit.” You don’t have the position you want, so do what it takes to get to the position you want!

People often struggle with this concept, but it doesn’t matter whether we’re talking about shares, vega, theta, or any other risk factor. The answer is always the same:Have a desired position.Compare what you have to what you want.Change what you have.

It’s honestly that simple.

Kind of…

In reality, adjusting your position incurs costs. You need to let your portfolio move around your target allocation by a bit. Exactly how much variance you allow is a balancing act:High costs? Allow more imprecision in your portfolio weight.Low costs? Allow less variance.Higher tolerance for being unbalanced? Trade less often.