Trading Epic Fury (Part 5)

Upon Part 4 completion discussing things that haven’t happened, they suddenly do. Let’s talk about the damage.

Equities continued their selloff on Friday with SPX down over 100 points and VIX spiking to 28. In Part 4, I discuss this second-to-last indicator (bullet point). Friday then delivers my biggest daily loss in about six weeks along with full VIX term structure backwardation (just after mentioning it wasn’t). Despite these triggers and underperforming the benchmark, I outperformed for the week (roughly +1.5% versus -1.0%) and am within my recent NLV range. For these reasons I maintained status quo.

I may now be in violation of the incident report guidelines. Part of the challenge is that I seem so much better positioned now than in the past when I’ve been fresh off catastrophic loss. As I’ve mentioned: PMR is relatively low, total contract size is low, TD is healthy, and delta neutral is not far away. John Maynard Keynes is attributed to having said “the market can remain irrational longer than you can remain solvent.” I need to keep this in mind because even though short-term mean reversion usually occurs, nobody knows when.

In support of “do something now!” is my large daily loss just posted. If it happens once then it can happen again.

Hurting on Friday was my Part 2 implicit guideline to trade only near the close. On a market trend day, I will get hurt waiting until the close and Friday was one such day where most of the day I lost due to positive delta. Do not be deceived: despite my EOD greeks looking fine, until those trade adjustments they looked worse and contributed to losses. Avoiding intraday trading can prevent whipsaws on choppy days, however.

While either approach has its pros and cons, unverified data per Google AI is consistent with what I’ve anecdotally heard discussed for years. Choppy days have accounted for at least 60% in 11 of 26 years available since 2000. On the whole, delaying trade until EOD seems like a better setup for success.

I don’t feel overly concerned given my current greeks and position size, but reasons to ditch the rose-colored glasses include:

• Keyes’ quote suggesting volatility can continue to go higher and higher accompanied by the market sinking lower and lower: losses can be catastrophic.
• Discomfort because while greeks remain in check, I now have ITM puts when I try to keep them > 100 points OTM.
• The final bullet point from the above-linked incident report is currently fulfilled because I really hope not to see a consecutive repeat of Friday. Hoping is really not a great sign.