Trading Epic Fury (Part 14)

Today I continue discussing the potential benefit of technical analysis (TA) as a trigger to get positive delta.

I want to make one clarification regarding equivalent terms: delta and net position delta (NPD). The former refers to one particular option whereas the latter refers to summation across the entire option inventory. I mean the latter in all cases despite using them interchangeably.

In Part 13, I explain where SPX crosses above the 20-SMA. Since I don’t actually know this until the close and because trading takes time, let’s be conservative and assume I wait an extra day for confirmation (Apr 7). The goal would be to maintain positive NPD thereafter by closing short calls as needed.

How much positive NPD to target is debatable but a good starting point would be equal theta:delta with opposite sign. This represents a windfall with the account on Apr 7 less than 4% off its high and every subsequent day then being profitable.

I would also be in position to capitalize on some volatility contraction [due to negative net position vega (NPV): see fifth paragraph here]. A massive upmove on Apr 8 drives VIX 4.8 points lower to ~21 but negative delta by the close would offset some negative-NPV gains. Most remaining short calls would probably be closed to re-establish positive NPD thereby allowing all remaining volatility contraction (e.g. on Apr 9 to 19.5 VIX drifting lower to 17.5 on Apr 17) to be realized profit.

With that as best-case scenario, second-best would probably be to target delta neutrality. The result would pit negative NPD by the close on some days against negative NPV and positive theta. I would still expect profitability over the next couple weeks.

The reality was negative NPD for two weeks beginning on Apr 1 as I gradually closed DITM short calls. SPX rallied 8.4% while my NLV sank 2.6%. Since crossing above the 20-SMA, SPX has rallied 1+ SD (close-to-close) six times with zero such down days. The train indeed left the station and, at least so far, has not looked back.

Market activity over the last several years suggests V-bottoms to be commonplace, but I always like to play devil’s advocate and consider other possibilities. When the market goes into correction, it has behooved us to look for signs of reversal in preparation for a strong rebound. TA can help with this but as stated in Part 12, TA is notoriously bad with prediction. The preceding five paragraphs could have been null and void were the Mar 30 low (left arrow from Part 12) taken out.

Stated another way, the table in Part 13 puts me in a mindset where these quick recoveries are doctrine but behold 2022! In the future, the only thing likely guaranteed is that change will eventually step to the fore.

I will continue next time with discussion of stop-losses.