Trading Epic Fury (Part 6)

Today I will discuss why the last two trading days (Thursday and Friday) are exactly what I did not want to see, pros and cons, and future directions.

In the second paragraph of Part 4, I mentioned the rangebound market in spite of Epic Fury. Then we get two straight 100+ down days for the S&P 500:

The market is trending lower as an orderly decline until the last trading day that breaches the lower [Bollinger] band of the channel. The feeling from this day is more like falling out of bed and hitting the floor because the second-to-last incident report [bullet point] indicator (also mentioned in the final Part 4 paragraph) just triggered.

Volatility (VIX) looks as follows:

Although shocking to see VIX up 3+ points on the day (after being up 2.5 points on Thursday: both circled), it doesn’t really meet the Part 3 criteria of a strong close because it’s not far greater than anything over the past weeks/months. It’s higher than the previous high on Mar 6 (arrow) but not by a lot.

Despite feeling like I have a black eye from losing 3.1% in one day, I have some things to feel good about:

1. Lost 1.1% for the week whereas SPX lost 2.1%.
2. Still very close to equity ATH whereas SPX is roughly 9% lower.
3. RSI is now overbought for VIX and oversold for SPX, which suggests near-term relief rally (not guaranteed!).
4. Decreased downside exposure Friday by closing one put contract.
5. Revisiting penultimate paragraph of Part 4, TD is still over 30.

I have plenty to be concerned about, however. Despite (5), the black eye has much to do with high positive delta. SPX falling 100 points can be tolerated when starting near delta neutral (4-digit TD on Wednesday). Otherwise, look out below and Friday began with the highest Epic Fury position delta thus far. Despite rolling calls down and even selling a couple more, I left myself with delta basically unchanged from Thursday, with TD halved, and with higher gamma: sounds like something of a fail.

Another concern is that (4) may not be as good as advertised. I started thinking a week ago that I could enter into a put-rolling campaign if necessary because the decline is likely to be time-limited. Along with (3), this represents blatant triggering of the above-linked incicent report’s final indicator. Recall John Maynard Keynes’ quote from Part 5 paragraph 3. Furthermore, while PMR is currently < 50% NLV, that can skyrocket in a heartbeat if the market continues [accelerates] lower.

Things to start tracking on a daily basis include:

• Number of open contracts at EOD.
• Weighted average DTE even though gamma may be a decent proxy.
• Daily SD move (for sake of first bullet point indicator in the above-linked incident report).

I will continue next time.