Risk Management Update

Last week we announced a number of changes designed to improve our service for all subscribers.

The session was recorded and subscribers can watch the full video here , however we’ve also summarized the article below:

Elliott Wave Options - Risk Management Update
What’s Happening?

We’re making changes to improve the experience for new EWO subscribers and subscribers with small accounts. Specifically, we’re endeavoring to ensure that our trading strategies conserve as much capital as possible to allow subscribers with smaller accounts an optimal experience.

This is particularly important for subscribers with less capital in the trading accounts, and after having run the EWO service for a few years now, we feel that we are in a good position to understand how to not, only manage the trades, but also the risk/capital management to help our clients be more successful.

What’s Changing?
  • We’ll be restricting access to our HighValue service which will in future only be available by application.
  • We’ll be clearly separating trades initiated for speculative reasons from those in our primary portfolios.
  • We’re updating our risk management approach in the Volatility Strategy to significantly reduce time in trades.
  • We’ll be launching a new “Income Strategy” that profits from non-directional trades and compliments our existing Volatility and Impulse Strategies.
Why is this happening?

Over the past 12 months we’ve noticed that has it became challenging for subscribers with small accounts due to changing market volatility and the resulting increase in our average time for each trade to complete.

Our trading style primarily relies on Elliott Wave patterns, and therefore when we set up a trade, we have an expectation of a certain outcome based upon that pattern. However, if that pattern fails, the rules of Elliott Wave generally provide us with an alternative pattern, or an alternative target based upon the failed pattern.

Therefore, our approach to trading has been to stay with the trade and adjust our position based upon the revised target or revised pattern. The principle is that once an initial pattern fails or becomes invalidated, the likelihood that the alternative pattern will occur increases. Since we started the EWO service, we’ve employed this trade adjustment to good effect as our track record shows.

However, the challenge with this style is that it takes time and capital to work through this process. This is where the problem arises for some subscribers, especially those with smaller trading account balances, and particularly in recent market conditions.

As I highlighted in my article in September 2021, volatility has been elevated over the past couple of years. A quick look at the VIX clearly illustrates this. The reason for this scenario is that market makers clearly saw more uncertainty in the markets during the COVID pandemic and were pricing this into options. The increased risk shows up as increased IV which in turn makes option prices more expensive.

Therefore, to minimise this impact on EWO subscribers, we’ve determined that various updates to our service will assist them in maintaining capital in their trading accounts. Lets go through the proposed changes.

1, Restricting Access to the HighValue Service

Our HighValue service offers trades where an entry position is greater than the max $500 risk that we recommend in our volatility and impulse strategies. This service was implemented earlier in 2021 as a result of demand from subscribers who were seeking trade alerts in more expensive stocks. The service was created on the basis that only those clients with larger accounts would subscribe for these alerts. If you were trying to trade our volatility strategy, our impulse strategy and the high value strategy you would require at least $60,000 risk capital in your account.

In practice what we have found is that many of our subscribers with smaller accounts, having had some success trading the impulse and or volatility strategies, become enthusiastic about our service and subscribe to receive the high-value alerts even though they don’t have sufficient capital.

We’ve seen this in the past six months with some clients suggesting that they are running out of trade in capital, which is at odds with the results we’ve been achieving in our basic portfolios. And when we dig into this a little deeper, we find that most of these clients have subscribed to the high value service without the necessary capital.

Therefore, we are going to implement an application process for the high-value subscription. Effectively will be asking you to give us some basic undertakings that you understand the level of capital required, and the level of risk involved in taking alerts from the services, before you will be granted access to the HighValue subscription. In this way we are hoping to prevent clients subscribing to the HighValue, possibly just because they think it is the best service, without really understanding the difference between the HighValue service and our other strategies.

2, Speculative Trades To Be Separate From Impulse Strategy

From time to time, we send out speculative trades or hold positions as a hedge. These are usually done within the Impulse Portfolio but don’t strictly meet the criteria of this strategy. This may tie up capital in smaller accounts. It can also be confusing for those trying to adhere to the strategy or assess the performance track record.

Consequently, we’ll create a separate grouping called ”Speculative Trades”. All clients will automatically be given access. When a Trade Alert arrives, it will be labelled as such so that you can distinguish it from Impulse trades.

Given, that we’ll be changing the range of trades within the Impulse Portfolio we’ll also update the track record to be representative of the Impulse results vs. speculative trades so that anyone trying to understand the likely outcome of following the strategy can see the more accurately representative results.

3, Revisions to Volatility Strategy Exit Timing

EWO Volatility Strategy trading style has been a big challenge, particularly in the past 12 months.  Uncertain market conditions have meant elevated IV, which in turn means more expensive strangles.That in turn has meant we’ve waited for more significant breakouts, resulting in longer time in trades and more adjustments.

Let’s take a look at a few key facts from the performance track record for the Volatility Strategy.

  • Average “Time in Trade” grew from 48 to 74 Days
  • Average “P&L Per Trade” dropped from 44% to 28%
  • Trades closed dropped from avg of 36 to 20 in 2021

While the strategy remains valid and profitable, capital required to maintain an account has increased. This necessitated a deeper dive into how best to adapt the trading approach.

Initially we look at trade construction and we shared that with subscribers throughout Q3 of 2021. This included attempting alternative construction of the strangle position (i.e., further ITM / ATM) which has seen some improvement.

However, we recently we completed a detailed analysis of exiting trades on a different basis without adjustments. If you’re interested in seeing this in more detail, please review the video linked above, however in summary the outcome of the analysis has been that we believe there will be significant benefits to subscribers in exiting trades early and minimising the adjustments we have made in the past.

Consequently, we’ll be making the following changes to the way we manage trades in the Volatility Strategy.

  • We will aim to Exit all open unprofitable trades at or around 21 days, depending on weekends, holidays, etc
  • Any open profitable trades at 21 days will be managed closely to maintain profitability

We believe that this will provide an average return of approximately 11% with an average time in trade of 21 days. We don’t expect to be fully invested in that portfolio and therefore expect an average return on the strategy of approximately 70% which is a similar range to what we’ve achieved historically.

There will however be a significant off set which is the % of winning trades. Using this approach will conserve capital because losing trades will be cut of quickly and we anticipate an average losing trade will be between 15-20%. However, the negative is that the 5 of winning trades will drop to an anticipated 40% because we will be taking an increased number of smaller losing trades.

Despite this negative, the figures tell us that we’ll achieve our overall objective of maintaining the overall performance of the strategy and prov ide some other psychological benefits for subscribers such as not having to add additional capital to a losing position and also not having to go through the expiration of worthless option positions.

4, Introduction of an Income Generating Strategy

While I don’t want to go into specifics of this new strategy yet, given that it will be officially launched in just a few weeks, I can say that the decision to launch this strategy is not a new one. We have been working on this for quite a long time and the timing of being ready to release the new service dovetails nicely with our objective of assisting subscribers to better maintain capital in their trading accounts.

What I can say is that the new strategy will be called the “Time Strategy” and it is designed to complement existing strategies by profiting in different market conditions:

  1. It will profit when stocks are trading sideways
  2. It will benefit from time decay

We’ve put a lot of work into developing the strategy. It is something that will be unique in the way that it identifies trades and we are confident that our present subscribers will enjoy a different style of options trading. Furthermore, we are also happy to confirm that all current subscribers will have access to this new strategy at no additional charge.


In conclusion, I am pleased to say that I am very confident that the changes we are making will positively impact the experience and success for subscribers to our trade alert service. We look forward to implementing these changes in the next few days, and consequently you should see the effects of these changes when you log into the service when you next log in.

As always, I would invite your feedback on the changes. We look forward to continuing to build the service, both trades alerts and education for our loyal subscribers!

Your Sincerely,

Rob Roy

Chief Trading Strategist

By Published On: November 23, 20210 Comments on Risk Management Update

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