Trading Epic Fury (Part 4)

I concluded Part 3 by saying Feb 5 does not trigger the second indicator (bullet point) here after stating in Part 2 that Mar 6 is also negative. The way Epic Fury has gone for me thus far, though, even a positive trigger leaves me with little to do.

Over the preceding weeks, VIX has been around 22-24 rather than the 14-17 seen during quiescent market periods over the last few years. Given constant position size, higher volatility means more extrinsic value and more negative vega. To be hurt by volatility spikes, VIX needs to spike higher and trade much higher than it did a few months ago. This can certainly happen—we’ve seen VIX as high as mid-80s over the last 10 years! It won’t happen with the market rangebound, though. We’ll see what happens next.

Over 90% of my portfolio has now turned over with an average VIX of 22-24. Volatility contraction to the previous 14-17 will benefit me. Volatility acceleration will hurt, but even a 10-point spike would probably cost less than 5% of my NLV. Other things [i.e. delta, gamma] could hurt more than volatility.

Since trading shorter-dated options and collecting less premium, I have been watching closely and letting contracts expire worthless. I shouldn’t really be doing this but in my defense, last Thursday I closed three different tranches of monthly (AM expiry) options despite being far OTM. In wartime, I wouldn’t be surprised by any big move and did not want to risk some of those contracts settling ITM. Kudos to me for keeping a cleaner kitchen.

In general for the Weeklys, nothing to date has been close at expiration partly because I have been gradually allowing total put contract size to decrease. My PMR is less than 50% NLV and that provides me with substantial flexibility. I’ve tried not to add more downside contracts but now three weeks in, I will as needed to keep theta high alongside TD.

Keeping TD high brings me back to the last paragraph of Part 1: selling more [short-dated] calls. As a result, I usually maintain 50-70 SPX points away from delta-neutral after daily trades. On market down days, I have at times sold more calls but with the gradual decrease, I will start to replace with fresh puts to offset the calls. If backwardation worsens then I will consider further decreasing risk by not replacing expired puts and selling fewer calls as well.

Another thing to watch for is the second-to-last bullet point here. That just hasn’t happened so far due to the other tweaks discussed. Along with my current PMR and knowledge that the lion’s share of my portfolio is now “snow tire equipped” (positions open at VIX 22-24 rather than 14-17) provides me with a great amount of mental fortitude and confidence in trading from one day to the next.