There’s been a lack of posts lately, been busy for the last 4 days preparing for a conference and catching up on work. I am going to UK/London on Sunday for a conference so I gather I’ll have more travel posts during that time 🙂
The market has been moving. It was 206.24 a few days ago and yesterday it reached 199.7. Big swings with yesterdays being the largest. The TRIN was 3.5
What is the TRIN?
TRIN = (# of advancing stocks / # of declining stocks) / (up-volume/down-volume)
Well, it probably isn’t useful to really get into it but a high TRIN shows that bears are overly optimistic and that the market is nearing a bottom. A low TRIN shows the opposite: the bulls are overoptimistic, the rally is unjustified and a market top is near.
The TRIN(Arms index), looks at up-volume and up-issues to down-volume and down-issues for the NYSE market. It is the ratio of advances to declines divided by the ratio of up-volume to down-volume.
I wanted to look at exactly how the portfolios performed during a major distribution day like this.
The result? If I don’t include QCOM A/H earnings movement we’re sitting at -0.63% for the day while the market moved about -2%. Does it mean anything? Not really. But it gives us an idea of drawdowns in large 90% major distribution days like yesterday.
Why, if we are completely insured, would we expect to fall on a down day?
Well,
short answer: it’s because this is a year long strategy.
long answer: It’s all to do with the pricing of the insurance/spy puts. ATM (at the money) puts have a delta of 0.5. What is delta? Well, it’s the amount the option will increase/decrease in price with a movement of $1 in the underlying equity. It essentially says you have 50% odds of a move in either direction.
For instance: We purchase 205 puts at $15 and the market is at $205 so we purchase that as our equity. Market moves down to 204. We lose $1 in the market and our insurance increases by 50c so it’s trading at 15.5. We’re down temporarily about 50c. As the market moves away from our strike (205) the delta will start to approach 1 and it’ll move in sync. If the market hits 185 our 205 insurance puts will be trading at about a delta of 1 so any down movement will be perfectly aligned with our equities.
I am annoyed by a few of the alpha picks. OCN was a huge drain on the month as was yesterdays QCOM A/H movement of -10% has hurt. Part of the game I guess.
How’d our momentum do yesterday? + 0.75%. TLT was up quite a bit, VNQ was down and LQD was up. Nice hedge isn’t it?
How’d our SPY/TLT trade do? Not great as expected. We did exit about 25-30% earlier in the week but my plan was to roll it on Friday the 30th. Unfortunately we’ve had a major market move which goes against us but that is sticking to the plan. The SPY/TLT trade is down -3.4% for the day. The trade itself is still up though, probably close to 10-11%. We did add TLT spreads both in March and February throughout the week that helped with the trade. Any decrease in VIX (volatility index) will help the trade. Why? Well options are priced higher when the unsurity or requirement for insurance increases (supply/demand). When there is fear in the market, people pay more for insurance (usually options) and that increases the costs for us to close the trade. VIX usually spikes on large down days and collapses on calmer days. A calm day would be an ideal day to close this trade. Tomorrow we’ll likely start entering March trade regardless whether we close our Feb one or not.