robo-advisor

The Beginning of the Self-driving Wallet

August 14, 2021
by Peter Seed

Title: The Beginning of the Self-driving Wallet

Just as self-driving cars can interpret acceleration, traffic flow and braking, self-driving wallets can analyze market trends, pick a stock and execute trade strategies.

Most investors gravitate toward equities representing companies with a track record of growth, cash in the bank and a strong management team. The idea is that healthy companies have the best chance for sustained stock appreciation.

As a pioneer in this space, currently in development, the UpTrade platform will be one of the view platforms that will be able to execute algo-driven trading on top of API-connected online brokerages. This is how UpTrade’s process will work.

First, UpTrade screens stock candidates representing healthy business fundamentals. Candidate stocks are well rated by stock analysts, have a solid quick ratio, quarter-over-quarter sales growth and a relative strength ratio less than 60 – just to name a few selection criteria. The point is, they are fundamentally solid as potential buy-and-hold candidates.

Second, rather than buying a stock at the prevailing market price, UpTrade takes basic steps to strategically time market entry into an equity position. Nobody can pick ideal times to enter a stock position 100% of the time, but the age-old adage “buy on the dip” is certainly a well-worn strategy and one that UpTrade will use on a regular basis to enter the market.

Monitoring a position by accounting for the real-time-value of money is a key factor. Machines do this very well. In phase three, UpTrade will monitor the position for an optimal exit point. Finding an optimal exit point often depends on a trader’s risk tolerance and the frequency with which a trader intends to withdrawal profits. Tax considerations also play a role.

Getting Away from the Coin Flip

Any stock pick is a coin flip as to whether it will generate a profit within a relatively short period of time. In the long run, most buy-and-hold strategies will generate a profit. But short-term investing can be a different animal. Throw meme stocks into the mix and it is nearly impossible to consistently pick winners.

A casual visit to a Reddit stock trading forum will reveal a new investment strategy worth noting – wheel trading. Basically, it is an option-trading strategy involving selling short-put options to get into a stock position and selling covered calls to get out. Traders swear by this strategy. UpTrade will automate it.

Buying on the Super Dip

Selling short options provides the potential for an additional discount on top of a normal price dip. The short-put trader enters an obligation to buy a stock at a price below the current market price. Thus, if there is a slight dip in the stock price, the short-put trader can get an additional 2% to 4% discount off the current market price by selling a put.

When the trader sells a put option, the short trader collects a premium. That premium reduces the basis cost of buying the stock if the shares are assigned at the strike price. And there is one other advantage. If the stock price goes up, the short-put trader keeps the premium without ever taking delivery of the stock. That’s called income generation. The use of short option strategies is a key piece of investment strategy that will be automated by the UpTrade platform.

Algo trading is a smart way to manage the higher risk side of an overall portfolio. No trader should go into option trading without knowing the basis, but if you grasp the concept of selling options, UpTrade wants to give you access to a smart, self-driving wallet that can generate short-term income.

The Lesson of the Max-loss Threshold

July 20, 2021
by Peter Seed

The Lesson of the Max Loss Threshold

Since I am a short-option trader, so I like to collect premium. Often feel like I am just raking in the money. I routinely close positions at 50% max profit. But every once in a while I get “tested” – sometimes by a lot.

One short-strangle trade worthy of sharing was with symbol GSX. In November 2020, I put on a short strangle on GSX. There was one short contract per side – 20 strike on the put side, 40 strike on the call side. At the time, GSX was trading at $30 a share and I collected about $500 in premium. All good, I thought.

Within a matter of days, GSX when to $120. And there I was… holding a 40 short call.

Yes, I made all the standard defense moves, but there was no stopping this black-swan, three-standard-deviation price move. Months later, I eventually took a $14,000 hit – a 28X loss. And it was a sobering event.

I learned a super-important lesson from this trade: You should always respect a loss threshold — beyond which you will mechanically close the position – no matter what. My close threshold is this: Whenever there is a 4X loss (unrealized) off the basis equal to the total amount of premium collected on a position, I close the position.

Inexperienced traders tend to treat a hard-close signal like this as a guideline rather than a rule. That once included me.

With the GSX trade, I did not have the benefit of an application that flagged my 4X loss – three days in. (I made that trade through Schwab). If I did have that flag, I would have closed the position after three days. Absent that, I was in for a bumpy ride.

From now on, using UpTrade, I will always exit a position whenever that prompt shows up – even if it pops up one day after I put on a trade.

Options Backtester for Fun and Practice

UpTrade is the world’s first robo-advisory for short options trading.

We are pleased to announce that we have launched our short-option-strategy backtester. This is just the first milestone in a product plan that includes live trading on top of brokerage APIs, connectivity to live investment advisors, fully-automated, short-option trading and seamless connectivity to DeFi applications.

Why Short Puts?

If you are familiar with options trading, you should first know that buying long options, a strategy that relies on market-direction sentiment, is often a risky proposition. Buying long puts, or long calls, is a leveraged investment. And leverage usually means risk. If your sentiment proves to be right, you can make a nice capital gain. But the odds of success are not in your favor.

Now consider the other side of the trade – being the option seller. That has better odds of success – house odds, some would say. We recommend starting by selling short puts.

As a first-time option trader, it may seem like there are an overwhelming number of alternatives to digest. How far out of the money should an option be sold? What expiration date is best? What do I do if I am assigned shares?

To help you weed through these issues, UpTrade automates the process of setting up and managing strategies. This cuts through the grumbly of putting on the trade from a complex trade ticket. UpTrade sets up a good starting position with a reasonable strike price (with 70% odds in your favor) and a realistic time until expiration (usually close to 45 days).

But before you dive in, you should know that not every option trade turns into gold. You should accept the notion that if the strike price is ever breached, you may be assigned 100 shares of the underlying stock for each contract you sell. Being assigned means you will automatically purchase shares at the put option’s strike price. This event will eat up buying power, or generate a margin call, if you don’t have enough money in your account. So beware.

Here is the good part in that equation: If you are assigned shares, you get to keep the premium you collected when you sold the option short. This effectively lowers the cost basis of the stock below the strike price.

One last trading tip: You should not wait until the short put option expires. Instead, consider closing out your position as soon as you reach 50% of the maximum profit possible on the trade. By doing this you take risk off the table and realize a sure profit.

“You never lose money by making a profit.”
-anonymous wise trader

Prove it

Our backtester proves what we mean by selling short options. Feel free to try it out. We have option price data going back two years for 600 of the most-traded underlying stocks. You can trade short puts, covered calls or short strangles. Pick a symbol, and a start date, and our robo-advisor sets up the suggested trade.

Push the Trade button to start the backtester and the resume button to resume if there is a pause in the action.

Remember to check the box to step through the strategy one day at a time, otherwise by default, you will jump ahead to the next significant event. UpTrade will post strategy-management prompts for your consideration along the way.

A complete guide to our backtester is here.

Make it Easy to be Smart

UpTrade brings smart trading to the masses. By learning the basics of short option trading, based on historic data, you can practice entry and exit points, along with various rolling strategies, before you risk real money.

Trade on, trade up.