Trading Epic Fury (Part 7)

Today I will continue the Part 6 discussion about last Friday and my current plan moving forward.

I wrote about a potential put-rolling campaign and how it violates the last incident report indicator on hope. To say “I hope I can outlast the market” does not always work and is the basis of the John Maynard Keynes quote from Part 5 paragraph 3.

Rolling alone will not cut position delta: the main culprit of Friday’s big losses [as discussed in Part 6]. While I have already rolled some puts ITM at expiration, as a whole they are tending toward [deeper] ITM. That means longer delta, lower theta, and Friday’s halving of TD. Worst-case scenario as DTE evaporates is a position delta of 100 x number of contracts with little call offset because selling 1 DTE means gone in 24 hours. Ever heard of “picking up pennies in front of a steamroller?”

Most of what I’ve discussed so far suggests I need to look for an opportunity to exit ASAP.

Volatility, the silent killer, actually bodes well for me. In addition to positive delta resulting in losses late last week, VIX up 5+ points cost me over 1% in negative vega. Volatility has always been mean-reverting and I think it safe to say “this soon shall pass.” For the moment lost “vega capital” lies in escrow as higher theta that will decay over coming days unless volatility continues to go up and up. Be careful not to make rash decisions on NLV alone when some contribution is due to volatility expansion that will eventually come back to earth.†

I was pleasantly surprised in checking the market yesterday around 3:25 EDT. The underlying was down another 45 points: bad. Volatility was down fractionally—good—but still near year-to-date highs: bad. Position delta had doubled from Friday: very bad and suddenly scary! Despite all this, NLV was up about 0.5%.

Rather than shut everything down, my daily trade adjustments were to:

1. Close one ITM put.
2. Roll one ITM put down (still ITM) and out one week.
3. Sell twice as many calls as previous—half each 2 DTE and 1 DTE.

Continuing to repeat (1) on such days [operational definition required] will shrink exposure to zero within a couple months.

(2) will help to avoid DITM puts with little theta that require lots of short calls to offset delta (certainly not preferred).

(3) cut position delta ~50% from previous trading EOD. It leaves PMR to the upside (somewhat alarming) but I’m not actually worried about a sustained bull rally until Epic Fury is essentially over and from what I see/read on a [no more than twice] daily basis, that certainly is not happening yet. In addition, they will expire quickly.

There’s a discussion to be had about getting negative position deltas. Perhaps I will pick up there next time.

† — Penultimate bullet point from the above-linked incident report is what it is without
       volatility consideration. Maybe a longer deliberation into that is warranted.