Incident Report Aug 2024 (Part 2)

I left off with reasons for encouragment in the midst of my August 2024 debacle. Also deserving of gratitude is the realization that even a return to making minimum theta can land me with a with decent YTD PnL despite a negative relative return.

Getting back to the meat of this incident report, when I look back I will see I could have escaped with no worse than a 10-15% drawdown rather than 25% or more. Better yet, I could have had my powder dry and ready to go instead of emotionally reeling and licking my wounds on the sidelines when Mr. Market chose to make a sudden reversal.

The following are indicators that I absolutely must monitor every single day (preferably in the form of a checklist):

• SD moves in the last five trading days: when we hit three then it’s time to do something.
• Spot VIX: when I see a solid close above the last several months then it’s time to do something.
• VIX term structure (as I have been doing): when it goes into backwardation then it’s time to do something. This may be too late for preliminary adjustments, though. Two grey areas worthy of future discussion include spot VIX rising into the term-structure range and partial backwardation.
• Daily ATR(14): when I see a move above the last few months then it’s time to do something.
• IV of option inventory: when any position increases 30-50% (relative not absolute), it may be time to do something. One caveat is the natural increase as expiration approaches making these positions okay to let expire if the underlying change (open) is positive. Otherwise don’t be shy: keep a clean kitchen and close the damn thing.
• NLV: be on notice when I see a bigger drop then I’ve seen in days. When I see the biggest weekly drop in the last few (several?) months then it’s time to say bye! Close positions or cut NPD and live to fight another day. Buying front-month protection for margin relief may be considered as an alternative to closing positions. If I am to close, perhaps managing winners and/or profitable contracts can be done first.
• When I feel myself hoping [not a financial strategy] for a market reversal, then it’s a huge red flag to get out.

As a final note, bonds created a new/different experience by limiting my cash balance. I may have BTC more on the Friday beforehand given additional buying power. Instead, I was forced to explore bond sales with less than one week to maturity [must phone brokerage directly for an institutional bid since this cannot be done online]. I could have done this within 30 minutes to get a bid but did not know or end up doing so.

In the future, look to raise cash at an earlier opportunity based on indicator(s) above to lessen risk to remaining balance should the hoping go awry [as it usually seems to do].

I do not monetize this blog and it is free for you to read. I can only imagine, though, how much this single post could be worth to traders of all experience levels…