STT Trades and the recent move

I was away for a week playing a poker tournament in Montreal. Got to 2nd day but lost 9 hands in a row for the exit. Final hand was a 2-outer. Villain had 88 and snagged an 8 on the river. C’est La Vie as they say in Quebec (and France). Then I was running around finalizing things for the house project I have going. Busy busy with lots of catch up.

Yesterday was a nice 2.6 STD move. For anyone trading STTs, you’d probably have noticed your balance drop, this is normal, the volatility will cause this to happen but with time and a slow down in the move, you’ll see it all fly back plus some (as I assume you’d be in your profit tent). if you backtest extensively, you’ll see this on every large down day move. The vol of the insurance you sold (the PCS) will rise quite a bit while the debit spread you have for protection won’t be that affected by volatility as you bought and sold closer (the vol of each leg offsets each other being closer to the money and closer to each other). Once the move subsides, they’ll keep their value better than the PCS which (probably still 200 points away from ATM) will drop in value quickly thus giving you your P/L boost. I’ve noticed a lot of my trades hit profit target days or a week after a larger down move.

Interesting enough, usually after a day like that, my margin will shrink quite a bit but today I woke up and my margin went from 25% available to 50%. Neat. With any other ATM trade usually I’d wake up with less margin available.

more to come..!

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