Feb 01 – Update

The STTs for Jun 29 are now approaching break even. Not bad when the market is in the exact same spot as Monday.

Another week or two and the profit tent should build up comfortably.

STT initial draw downs

Thought I’d share some of the nuance of STT draw-downs during the past several days which I found interesting but expected after back-testing it to death. Always different live though isn’t it? In the last 18 months we haven’t really had large VIX spikes or bearish moves so it’s a nice refresher on how things actually work in real life re trading.

I had entered several June 29 STTs last week when VOL spiked quite high despite the move upward. VIX was telling us that demand for protection was increasing as the market moved up. Traders were protecting themselves. The STTs were a decent price given the pricing of OTM options so I used that to compliment the entries I had the weeks prior in the June 29 expiration. On Monday, the market fell and we had a spike to 15.3 VIX area. So we went from a 9 VIX environment a week prior to a 15 VIX environment. The move was relatively small in the SPX but the VIX move was quite large. That day, the market was hovering around SPY 281.5 with a touch of 281.22. About the same place it was the week before. However, the STTs I entered drew down about $550-$600 a unit which closed in on a 100k total draw down. Of course, these types of VOL based draw downs are temporary and they follow the VIX spikes you see in the charts. If you see a large spike, expect a temporary draw down, likewise, even if the market continues down, if the spike subsides, expect your STTs to regain in value. This type of thing is most pronounced with a move from a low vol environment to a higher vol environment and it will affect newer STTs more than developed STTs. Likewise, If we start entering STTs in this higher vol environment, they’ll be less prone to vol shifts. Anyways, it’s Thursday, and pre-market is down to about 280.6 area and my STTs are only drawn down about $250 a unit yet the market is lower than it was on Monday. Totally normal and give another 10 days, we’ll likely be green pending no disaster in the market. All the while, I’ll be entering more and more STT and setting the next several months up as a success. As time goes buy, the profit tent will build up and even with the market moving lower, the STTs will regain value and eventually, probably in the next 30 days, we’ll be reaching profit targets. If we have another shock event or a shock VIX spike, we’ll have draw down but it’ll likely be less than the initial one as time has gone buy and time builds resilience in the STT. Yesterday they were only down about 200 a unit. Totally normal following a large spike with brand new STTs. Again, time kinda cures all of this. Given another 10 days, it’ll be very hard for the STT to draw down this amount again unless we have an actual larger bear move that requires adjustments etc. The STT likes grind down markets and can handle a sudden move and it’ll often do really good if we can get a bit closer to that tent. Give it 30 days and we and very likely we’ll be green and in a sweet zone for further profit expansion.

This is a great environment to get into STTs and if we can keep this going, we’ll be laughing.

Those vix spikes are great times to enter more. I did. Now we let this move play out and adjust as we need (I usually add condors weight to the direction I need to hedge). I will at times add debit spreads as well.

I’ve converted old STTs (March) to hedge structures by selling some of the longs of the PDS and buying back twice as many of the shorts of the PCS as well I’ll buy back the PCS at cheap prices and sometimes sell a bit more of the front long to compensate etc etc. Credit to Rui @ the PMTT Group for the idea.