Market correction 

So that was interesting.  The open was about as close to a flash crash as you can get.  The market fell from 2000 at about 3pm on Friday to 1820 or so on Monday 2 min after open invoking various halts.  That’s about an 8 percent fall. To witness and experience that was something else.  The decline triggered 1200 halts in the first minutes of trading as SPX liquidity disappeared. That obviously hurts all of our market neutral trades significantly. You couldn’t see MIDS and fills were tough to get.   Probably the worst day I’ve experienced in the market yet.  But I’ve learned a few things and will be better for it.  It was my first flash crash like condition and I feel like I need a t-shirt saying I survived it.  Today the market is up almost as much as it was down yesterday.  Again,  not great for market neutral strategies!  

Back to back 90% down days happened 8x in the last 5200 trading days.  It happens 0.2% of the time since 1931 and the speed and magnitude was on par with the worst. 

Look at that drop


Aug 23- Trade Update

That was a week for the history books. Oil had its largest weekly fall since ’86. Vix went up 47% in a week which is the highest in all history. The speed of the decline was also extremely unusual. I’ve read that perhaps the market cycles will be more square like rather than Sine like due to the efficiencies in this age (information hits markets instantly). Anyways, this decline reminds me of the up movement in October. These things are happening over night and giving no-one time to adjust. It makes for managing time decay based strategies quite difficult.

The protector portfolio is actually still up just shy of 1% while the SPY is down 4%. The equities were actually still up 2.5% but the hedge is down about 1.5%. So its outperforming SPY by about 5%. Nice. However, this last very swift correction has told me that I have have too much downside exposure. The MIC does not like increased volatility and sharp down moves nor does the protector. These were my leading strategies up until about a few months ago when I added the M3 and Bearish butterflies. Both of these have held up and are still mostly profitable though bruised from their specific highs. I’m leaning too much re risk to the downside and I need to adjust the ratios of the strategies. I’ll probably reduce the Protector to about 15%, the MIC to about 15% and the M3 to 50% and do the Rock trade and opportunistic Bearish Butterflies with the rest.

Like I said above, though, I know exactly how the protector would perform in a sharp down move, I’ve decided I am not comfortable with the downside exposure when coupled with everything else and how it affects my downside risks. Having two strategies go sharply down at the same time is not a great feeling and adds unnecessary stress. So I’ve decided to start working on lessening the ratio of these strategies within my own portfolio. I won’t be doing this reduction willy nilly but timed appropriately. The strategy does well, I mean it’s still up it’s just doesn’t fit well within all the other trades.

The RUT trades are down about 4-5% during that last fall. I imagine at least half of that is stuck in the prices of the options re volatility. Remember, the RVX/VIX are at extreme levels. That means that the options are priced with a lot of premium. The same options we sold. So the trades appear quite down. As time gets closer to expiry this volatility has to flow out and we’ll continue to maintain appropriate risk. Ideally, we don’t correct much more than a few more % before a strong bounce.

The SPX MIC trades are down 9%! This is expected as the SPX was the most dramatic collapse of the two. It fell 3% on Friday while the RUT only fell 1.1%. Any bounce should recover the trade to at least 4% down and we’ll do a larger adjustment then while maintaining appropriate deltas if we should have more down Monday. As we close in on expiry, I’ll be doing my best to get these things back to break-even. I’ve done it 2 times before during a correction. It just takes appropriate risk management and a level unemotional head 🙂

Overall, as of right now, with the options volatility at extremes and thus the option pricing also at extremes, when we look at all Aug (already posted results) and Sep trades, we are down about 2-2.5% overall. Not bad considering the events and also not bad since it is quite likely we will recoup a lot in the Sept trades. The trades weren’t designed really to withstand a furious drop with 80% of the downside happening after hours. Unfortunately, you can’t design a trade to weather all storms.

As I am following market news right now, I see that the bank of China has indicated that they are lessening reserve requirements, S. Korea and N.Korea have de-escalated the skirmish and Iran has requested an emergency OPEC meeting to combat the falling oil prices. This might be the bullish catalyst to spur a furious bounce. We shall see. A bounce would certainly be nice for the protector and also to adjust the MICs.
Update:  In an effort to curb the fall in the markets, China is going to allow pension funds to invest 30 % of its assets(546 Bln) in the financial markets and that includes all sorts of financial instruments.  Let’s see if the Shanghai composite holds that 3500 level and we see a bounce. 

Aug 22 part 2

Man, I had it half right here 

The market hasn’t done a whole lot except hold range despite negative headlines. This tells me that perhaps we are ready for a leg up. But only time will tell. The long term bollinger bands are about as tight as they have been for 65 years. So either way there should be quite an explosive move but in what direction remains to be seen. The market corrects at least 5 percent each year and it hasn’t yet (well the RUT (8 %) has and most individual stocks have, but not the SPX).  


It was damn explosive and a big move was apparently brewing when I wrote that.  

Aug 22.  Trade plan


That sucked.

Market fell 6.5 or so percent in two days. The speed of the decline is extremely rare.  It used to take 7 days to fall that far – historically. The VIX (volatility index) is 97% above its 21 day moving average. It’s only been higher during the flash crash and the U.S. Debt downgrade. The put volume is also the highest ever recorded.  The VIX is up 40% and the cpce ratio is in extremes.  Probably more down to come but we should expect some bounce as all these extremes suggest it is near.  The 198 level on spy is significant and I am hoping it holds for now. The interesting thing is the Small caps out performed on Friday right at a significant level and maybe that suggests the SPX will too at least during this leg.

However, I am sure that more down will come after the bounce. Not to say we won’t instantly go down Monday.  You might get all the folks who don’t follow the market get scared by the crazy news on TV and newspapers this weekend and they will call their brokers and sell out of their 401ks.  That brings a new type of seller not present before and that worries me re Monday and having more down before a bounce.  

I wish I was out of my protector portfolio and scaled into the new strategies I’ve been trading (m3, bearish butterflies and rock) all of those are still up cash! Resilient damn trades! Not to say they don’t have weaknesses but they are more well rounded than an MIC or protector. 

  My protector went from plus 4.5% to negative something or other over two days.  That hurts.  

The MICs for September are all down now and heavily in the 5%+ range due to the massive volatility increase and the fact that most of this extremely fast decline came in after hours or five minutes before close making it very challenging.  The loss hurts even more than the protector.  Nothing could have prevented that.  The speed of descent gave little room to adjust at good prices and the massive (and I mean massive) increase in the volatility has caused the options to be priced extremely high and since we sold that insurance, well it’s more expensive to buy back and just as expensive to adjust.  It’s extremely (almost correction level) expensive.  Time and (hopefully) prudent adjustments will solve that as expiry is three weeks away.  

My account balance, though at all time highs three trading days ago is now about 10 percent from that level. Most of the loss is from the protector (which is expected and not worrying in any way). The protector puts are now more delta negative and as the market falls it should more closely match the losses on the longs. 

The MIC can likely get back up to break even or maybe positive with some luck,  while the protector requires an up move.  But bad news aside, with declines like this we have opportunity and I am spending the weekend thinking about how to handle Monday and our current trades and what to do with future down moves re position.

Aug 19 – Trade Plan

We are now 4 days into our cruise and about 11 days from being back home in Cayman.

Right now we are in Trondheim, Norway and have so far seen Flam and Alesund and a whole series of Fjords including one that was listed as the number one thing to do before you die by National Geographic.  The four of us went out in a rib and toured around.  Was fantastic but I am not sure what else can beat it 🙂  

The market hasn’t done a whole lot except hold range despite negative headlines.  This tells me that perhaps we are ready for a leg up. But only time will tell.  The long term bollinger bands are about as tight as they have been for 65 years.  So either way there should be quite an explosive move but in what direction remains to be seen.  The market corrects at least 5 percent each year and it hasn’t yet (well the RUT (8 %) has and most individual stocks have, but not the SPX).  

I got out of all the August trades at 5.6% (half tranch of MIC, two rock trades, an m3 and a few bearish butterflies). We were in both August and September trades for the month and soon come we should be at profit target for those and they will be closed soon and can conclude the months results which are very positive.  

Our protector portfolio is up about 4.5 percent for year while spy is at around what 1.5%?


Aug 13 – Trade plan

These past few weeks have been interesting. On the 6th, the market fell quite a bit but we were only 3% from all time highs.  There were no new headlines just the same old bearish stories (rate hikes, Puerto Rico default, Greece etc etc). I didn’t expect a full out correction because the people scared of those specific head lines had already sold long ago and we were only 3% from ATH.  Obviously, the current holders weren’t too worried about those specific issues and aren’t going to sell on most news coming out of those regions.  However, on Monday we had a new headline which wasn’t present before, the devaluing of the Yuan and the implications of a weakening China.  These types of unexpected headlines are the ones that have the power to cause selling. It takes time to quantify the effects of a devalued Yuan and brings an unknown into the market for most participants and unknowns can cause panicked selling.  I didn’t expect as strong a bounce we had yesterday and the strength of the down move usually suggests more to come.  I waited for a smallish bounce to reposition and ended the day with a negative delta upside risk! Go figure!  Anyways, this is a very whippy market and normally I’d be moving my delta limits on the upside a bit higher to accommodate for the volatility. However, this market refuses to correct. It had the opportunity yesterday and it decided to close green. Yesterdays action suggests more upside ahead barring no new headlines from China.  It was definitely a bullish move and I’ll be taking that into consideration alongside my current thought to allow more upside room before adjusting. Confusing market no doubts.

The devaluing Yuan should help the US economy as it is a net importer so maybe this was a washout opportunity to shake out the confused and fearful weak hands for a big bullish move to all time highs?






Aug 13 – Back in Action

It was a rough go the past 2 weeks with more sporadic travel, driving and hotel stays. This put me in a constant catch up mode with both work and the market and I had little time to update the blog.  I should will be back to regular posts and updates from here on in, probably every day.

We’re now finished the “road trip” part of the “sabbatical” and are in London, UK where we will trade in our Tesla for an american version for use in the Cayman. Tesla HQ is accommodating me in this respect and I’ll end up with a new P85D (a 3s 0-60 car) for not a whole lot more when considering the differences in the price of the Tesla in UK vs USA. It all worked out.

The market was nuts yesterday. That was a tough tough go but I am confident and proud in how it was handled. The market fell 1.6% only to rebound into the green for a 3% round trip in one single day all the while the entire market has moved 5% in the entire year!  Not an easy environment for a theta based market neutral group of strategies. In fact, it was or should have been one of the toughest days a trade like that could experience.

For the M3s I added 1170 butterflies to hedge the downside and on the bounce (around RUT 1195 – an area I expected the bounce to stall) I took off some 1230s. Of course, the market did something I haven’t seen and the SPY ended up closing green on a <1.5% red day and the RUT just slightly red sitting around 1210 after touching the 1180s. Ah well, my entire account balance didn’t move to much by the end of the day (down maybe 0.5%) but the adjustments surely cost me. The size and intensity of the adjustments were nominal and probably the best case we could have expected if a rebound this size should have occurred. Can’t help but wish you were psychic and could have waited 🙂 With a fall that intense, you have to manage your risk and it is what it is.

The AUG MICs were mostly closed on Monday (thankfully). Some straggling parts to close out today. Will post the results soon. All positive.

The SEP MICs had debit spreads and bearish butterflies added to them on the down move yesterday and are probably around break even so far for the month.

Come Sept 1, I’ll start posting all my trades and adjustments as they occur.


Aug 1 – Trade Plan

I’ve officially added the M3 trade into my larger portfolio. I find it a much more conservative trade than the MIC in terms of risks, but strangely it should produce slightly better results, which is quite interesting.  It’s also a lot less stringent on timing of adjustments and more forgiving in general. From a direct comparison to just the mechanics of the trade vs the MIC, it is a better trade overall. The edge for the MIC is my experience managing it.  Either way, it’s a nice strong compliment to the MIC. The M3 is a trade John Locke developed when he was at the Sheridan mentor program. He’s since branched out on his own. It’s 10 bearish butterflies coupled with 1 long call thats DITM as to have no time value. It’s a market neutral time decay based trade. It’s got very little upside risk, and the downside adjustments usually occur when the trade is already up money and when the butterfly is close to its max value for that specific time in the trade. That’s neat.

Theoretical backtesting of the MIC in a strictly mechanical way produced an average of 3.3% a month since 2008, where the M3 produces an average of about 5% per month. However, with active management of the MIC and use of several indicators, I gather I am closer to 4%-4.5% over time.

For a neat look as to how well the M3 handles any market environment, in 2011 if you had put the trade on at the top of the market and had it on through the huge 63 point down day (what was that 8% down day?) and all the way to the bottom (~200 points??) and its subsequent rebound, the trade still came out at a win of the target 10%. That’s a resilient trade. This was managing the trade by checking only once per day at 3pm. That’s it. No intra-day adjustments besides that. Even during that 63 point down day, it was still up money.

Come September, I’ll start posting my trades and adjustments.