ABNB short term short & a trading system development ride along
Updated
So I'm not one to short. For a lot of reasons. I HATE margin. It's like a credit card where the things you bought can go up in price after you buy them, you're charged interest on them immediately, and the "credit card" company can require you to pay your bill early. As someone who has never in my life carried a balance on a credit card except accidentally, that is 100% NOT my style. Margin creates an added layer of complexity and difficulty to any trade it involves.
Add to that, shorting is potentially infinite in the losses it could create, whereas the gains are capped at 100%. Others may use it, but it's not for me and it is ESPECIALLY not for those new to trading. It is a ticking time bomb waiting to explode your finances and knock you out of the game, and possibly your home. To be honest, (unpopular opinion alert) if you can't afford to be trading your own money and have to borrow money to be able to trade, you probably should NOT be trading. OK, I'm done ranting.
What I am about to describe has to do with the process of how I decided to do this trade. I'm going to leave out some of the details, because
a) a trader's gotta have his "secret sauce"
b) a lot of you are new to the game and if I told you all I know about what I'm gonna do, and especially WHY, you'll take it the wrong way.
DISCLAIMER: DO NOT TRADE THIS WITH ME.
This is an unproven system. My regular system works great on long trades, but historically not that great on shorts. That's not entirely surprising since the market has a general upward bias to it. There's more reasons why, but you don't get to know those (secret sauce).
The system I'm working on for shorts did evolve out of my original system, though. I am a person who when something I try doesn't work, I have to know WHY. And I think that's good advice for traders developing a trading system (or more importantly, following someone else's fancy charts that you don't understand).
If you make a trade and it doesn't work, you should make sure you know WHY. Don't blame it on the market or the Fed, or shorts, or whoever. If a trade goes wrong, YOU potentially made a mistake somewhere. And that's ok. Sometimes they are unavoidable mistakes. But sometimes they aren't, and you owe it to yourself and your system, to understand what went wrong so you can fix it if it's fixable.
So this system I'm testing "live" in front of you, began as I tried to answer the WHY of my system not doing well on overbought calls the way it did on oversold. I noticed a curious feature of the overbought calls it made, and asked "is that consistent enough to be tradeable?" If not, I had to go back to square one. If it was, the only way I'd know for sure is to backtest it to death. And I have been, for months.
I had to tweak some things, but here we are, so obviously it passed that test. The next question became HOW to trade it. I started with a rant about margin and that's the simplest way to trade shorts, in many ways. I knew that was not for me though, so it left me two options. Pun intended.
One was inverse ETFs that move the opposite direction of the underlying stock or ETF. The problem is that not all stocks have them and the ones that do, often trend HARD and that's not good for what I'm trying to do. For some of the ETFs it works OK and I'll probably use them from time to time here as I work out the kinks of my system.
The other option is put options. Both inverse ETFs and put options do something important for shorting, and that's limit your losses. You can only lose 100% of an option or ETF, and that levels the odds out a little bit with shorting. Options, however, introduce TIME as a variable, making things much more complicated. Now, in addition to being right that the stock is going down, I have to know WHEN as well. That's why ordinarily I don't use options as much.
Sometimes the market has ideas for a stock that are VERY different from my own and trades that normally work out in a few days, end up taking much longer (see my idea on
BROS as an example of that happening).
With options, every day that trade takes costs me money because of time decay. But I'm going to use options here, because my backtesting tells me that 1) time usually shouldn't be a factor and 2) the leverage in options (in THIS case) can help minimize the effects of the times a trade doesn't go according to plan.
My backtests on ABNB and other stocks, tells me how long a trade will likely take to work out. That's important information to have when choosing WHICH put option to trade. It also affects the strike price I choose. I'll be honest when I say I'm not sure I have chosen the optimum options strategy, expiration and strike here - and that's a big reason why you shouldn't trade this with me. If I make mistakes it will cost me money. You can learn from my mistakes for free by just following along.
So for ABNB, in its albeit short entire trading history, the short calls my short system made worked out positively the vast majority of the time and the trade generally took less than a month to play out. For this reason, I chose November 15 expiration. It gives time for the trade to work out before time decay really starts costing me money, since decay accelerates closer to expiration. I could have gone out further to avoid decay, but nothing comes for free in the markets - I'd have to pay more for the option.
I chose puts as close to the current price as possible, because the trades I'm looking to make aren't 20 or 30% moves in the stock. They are relatively small gains like my long system that pay off in volume rather than size of the wins. I won't go into a full discussion of options pricing. I'm not the guy for that anyway.
The mechanics of the trade are different than my long trades. Here, only one lot will be purchased. I will hold it simply until the stock price is lower than when I originally made the trade. If it never gets lower, I could lose 100% of the money I spent on the option unless I cut the trade short - and that is a non-zero possibility that I understand going into the trade. But like my long system, the winners should collectively compensate for those and interestingly, that was part of the reason I choose options. That would be much harder to do here with just shorting the stock because the changes in price here are smaller than with my long method. They will be shorter trades as well, in most cases.
So today, at the close, I purchased the November 15 $130 put on ABNB for $6.90 ($690 dollars). As soon as ABNB stock is below 131.18 as it approaches the close, I sell it. If that's Monday, it's Monday. If it's a week from now, fine. Longer than that and I'll start getting "nervous" because if it takes longer than a week, things become a little bleaker for the trade's prospects.
So there it is. Good luck to me, not you because you're just spectating. I'll update things as the trade plays out and will do a post-trade analysis however it turns out. Enjoy your weekend!
If you have questions or comments about anything I've written here, feel free to comment and I'll answer them as soon as I can.
This is obviously market-based financial edutainment and is aggressively NOT investment advice, as I think I've made clear here. Not only do I not encourage you to trade it, but if this trade works as expected, you won't be able to successfully at this point. Just enjoy the show, everyone. 🍿🥤
Add to that, shorting is potentially infinite in the losses it could create, whereas the gains are capped at 100%. Others may use it, but it's not for me and it is ESPECIALLY not for those new to trading. It is a ticking time bomb waiting to explode your finances and knock you out of the game, and possibly your home. To be honest, (unpopular opinion alert) if you can't afford to be trading your own money and have to borrow money to be able to trade, you probably should NOT be trading. OK, I'm done ranting.
What I am about to describe has to do with the process of how I decided to do this trade. I'm going to leave out some of the details, because
a) a trader's gotta have his "secret sauce"
b) a lot of you are new to the game and if I told you all I know about what I'm gonna do, and especially WHY, you'll take it the wrong way.
DISCLAIMER: DO NOT TRADE THIS WITH ME.
This is an unproven system. My regular system works great on long trades, but historically not that great on shorts. That's not entirely surprising since the market has a general upward bias to it. There's more reasons why, but you don't get to know those (secret sauce).
The system I'm working on for shorts did evolve out of my original system, though. I am a person who when something I try doesn't work, I have to know WHY. And I think that's good advice for traders developing a trading system (or more importantly, following someone else's fancy charts that you don't understand).
If you make a trade and it doesn't work, you should make sure you know WHY. Don't blame it on the market or the Fed, or shorts, or whoever. If a trade goes wrong, YOU potentially made a mistake somewhere. And that's ok. Sometimes they are unavoidable mistakes. But sometimes they aren't, and you owe it to yourself and your system, to understand what went wrong so you can fix it if it's fixable.
So this system I'm testing "live" in front of you, began as I tried to answer the WHY of my system not doing well on overbought calls the way it did on oversold. I noticed a curious feature of the overbought calls it made, and asked "is that consistent enough to be tradeable?" If not, I had to go back to square one. If it was, the only way I'd know for sure is to backtest it to death. And I have been, for months.
I had to tweak some things, but here we are, so obviously it passed that test. The next question became HOW to trade it. I started with a rant about margin and that's the simplest way to trade shorts, in many ways. I knew that was not for me though, so it left me two options. Pun intended.
One was inverse ETFs that move the opposite direction of the underlying stock or ETF. The problem is that not all stocks have them and the ones that do, often trend HARD and that's not good for what I'm trying to do. For some of the ETFs it works OK and I'll probably use them from time to time here as I work out the kinks of my system.
The other option is put options. Both inverse ETFs and put options do something important for shorting, and that's limit your losses. You can only lose 100% of an option or ETF, and that levels the odds out a little bit with shorting. Options, however, introduce TIME as a variable, making things much more complicated. Now, in addition to being right that the stock is going down, I have to know WHEN as well. That's why ordinarily I don't use options as much.
Sometimes the market has ideas for a stock that are VERY different from my own and trades that normally work out in a few days, end up taking much longer (see my idea on
BROS as an example of that happening).With options, every day that trade takes costs me money because of time decay. But I'm going to use options here, because my backtesting tells me that 1) time usually shouldn't be a factor and 2) the leverage in options (in THIS case) can help minimize the effects of the times a trade doesn't go according to plan.
My backtests on ABNB and other stocks, tells me how long a trade will likely take to work out. That's important information to have when choosing WHICH put option to trade. It also affects the strike price I choose. I'll be honest when I say I'm not sure I have chosen the optimum options strategy, expiration and strike here - and that's a big reason why you shouldn't trade this with me. If I make mistakes it will cost me money. You can learn from my mistakes for free by just following along.
So for ABNB, in its albeit short entire trading history, the short calls my short system made worked out positively the vast majority of the time and the trade generally took less than a month to play out. For this reason, I chose November 15 expiration. It gives time for the trade to work out before time decay really starts costing me money, since decay accelerates closer to expiration. I could have gone out further to avoid decay, but nothing comes for free in the markets - I'd have to pay more for the option.
I chose puts as close to the current price as possible, because the trades I'm looking to make aren't 20 or 30% moves in the stock. They are relatively small gains like my long system that pay off in volume rather than size of the wins. I won't go into a full discussion of options pricing. I'm not the guy for that anyway.
The mechanics of the trade are different than my long trades. Here, only one lot will be purchased. I will hold it simply until the stock price is lower than when I originally made the trade. If it never gets lower, I could lose 100% of the money I spent on the option unless I cut the trade short - and that is a non-zero possibility that I understand going into the trade. But like my long system, the winners should collectively compensate for those and interestingly, that was part of the reason I choose options. That would be much harder to do here with just shorting the stock because the changes in price here are smaller than with my long method. They will be shorter trades as well, in most cases.
So today, at the close, I purchased the November 15 $130 put on ABNB for $6.90 ($690 dollars). As soon as ABNB stock is below 131.18 as it approaches the close, I sell it. If that's Monday, it's Monday. If it's a week from now, fine. Longer than that and I'll start getting "nervous" because if it takes longer than a week, things become a little bleaker for the trade's prospects.
So there it is. Good luck to me, not you because you're just spectating. I'll update things as the trade plays out and will do a post-trade analysis however it turns out. Enjoy your weekend!
If you have questions or comments about anything I've written here, feel free to comment and I'll answer them as soon as I can.
This is obviously market-based financial edutainment and is aggressively NOT investment advice, as I think I've made clear here. Not only do I not encourage you to trade it, but if this trade works as expected, you won't be able to successfully at this point. Just enjoy the show, everyone. 🍿🥤
Trade closed: target reached
Closed the put just now for 7.65 and a +10.9% return in one day. I'll update and analyze later. I have other trades to make now.Note
So it's kind of disappointing to say this went exactly according to plan, because it's not as good for teaching about the process that way, but it's the truth. I will let you in on a few secrets and things you can learn from it though. And I'm not taking total credit for things working out perfectly, by the way. Sometimes things just happen right in the market and this was one of those times. I will take credit for the fact that I put myself in a position to reap the benefits, though, and there's a lesson in that for everyone.
I didn't choose ABNB by accident for this trade. There were multiple stocks that my system flagged as short candidates. I chose ABNB because after backtesting it, I thought it gave me the best chance to be successful. That's a lesson on its own that is good to be reminded of. I don't care how you trade, whether it's chart patterns, fib levels, trend lines, technicals, whatever. There will always be multiple stocks that fit the parameters of your trade. Simply choosing the first one you come across is not putting yourself in the best position to win the trade. One of those stocks has an 'edge' over the others, and it's up to you to find it if you want to be as successful as possible when trading. The more finite your trading capital is, the more important that edge becomes, because you can't afford to be wrong as often when your capital is limited.
I chose ABNB because in my backetest, 61 of the 65 signals were profitable in 20 days or less. 75% of the signals resulted in wins in 3 days or less, and 50% of those trades were profitable in ONE trading day. Those stats were better than any other stock I was considering. That doesn't mean the trade HAD to work out the way it did, but I gave myself the best chance for it to do so, and sometimes that's the difference between a winning trade and a losing one.
In the backtest, the median gain on all trades (including some big losers) was .98%. So I wasn't holding the put, waiting for an 8 or 10% drop in the stock that some of the signals had produced on ABNB in the past. I was looking for a profit. Period. That's lesson #2 - DON'T BE GREEDY.
I have lost a lot of money trading while waiting for a win to get bigger or an already big win to get huge. I know that every new day in the market brings with it the unexpected. I think there's a decent chance ABNB goes down even more tomorrow, and if it does, a big drop would not surprise me in the least. That would make me more money, obviously. But a big run up might happen too, and that's why this was always designed as a 1 day trade.
Many of those wins in my backtest would have become losers holding them longer than it took for them to become profitable, especially the 1 day wins. I play the odds, and the odds said to walk away with a not quite 11% gain in one day. There was a 100% chance I'd have more money than I started with if I did that, and an almost 50% chance of losing that profit and then some staying in the trade 1 more day.
As for the put option itself, this was the biggest unknown for me. With stats like the ones I just described, it was hard not to do a weekly option instead of 2 months out. When 75% of your trades would close in 3 days, it seems like the way to play it. And long term, it might be. But 65 trades isn't a huge sample size, and my short system still is in the training wheels stage. I knew I'd make more money with a weekly, but if the trade went longer than a couple of days, even if the stock dropped, time decay might have cost me my profits.
Is it hard knowing I could have made 52.2% today on this trade instead of just 10.9%? You bet it is. But when I'm trying something new, I err on the side of safety. This is a long game I'm playing. I want to have as much money left available to trade as possible once I get to a point where I'm super confident that what I'm doing is going to work, and I was nowhere near that level of confidence going into the trade. The longer option gave me more time for the trade to play out, had I needed that. I also really didn't know what, if any, affect volatility changes were going to have. I had an idea, but I don't trade options enough any more to have a good handle on that, so I used the longer option as a way to minimize any changes in vol, while I was in the early stages of testing this system.
Looking at it now, the smart play on future trades involving ABNB might be to use a 1 month or even 2 week option and simply close the trade within 5 days, win or lose. I don't know that yet, and it's going to be a while before I do. So for now, I'm happy with how the trade went, but I feel like I'm still a long way from knowing the best way to take advantage of the variables and optimize profitability. But every trade, I'll learn something that gets me closer to that goal. In retrospect, maybe leaving some money on the table was a good learning experience. There's something to be learned from every single trade I take, win or lose. Being committed to doing that learning every day with every trade has made me a MUCH better trader and it will help you too, if you take the time to do it.
Note
Trade summary (for my records)
Nov 15 $130 Put with stock trading at 131.18 - $690 cost
Target: approx. 1% drop in stock price
Profit target: unknown
Target trade length: < 5 trading days, ideally 1
---------------------------------------------------------------------------
Result:
Stock fell 1.64% ✅
Sold put for $765
Gain: +10.9%
Trade length - 1 day✅
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