I’ve looked at a few new adjustment parameters to the MIC trade
Adjustments on the Upside:
First two weeks of trade
1. Delta @ 25 = Roll up debit spread 10 points
2. Short Call doubles in value = Remove 1 unit or roll up 10 points
Next 1.5 weeks of the trade
1. Short call reaches 1.5x value = remove 1 unit
Last portion of the trade
1. Short call reaches 1x value = remove 1 unit
The basic tenet is that the first two weeks we want to give the trade a little room to breath. If Delta of the entire position hits 25, we’ll roll up the debit spread portion by 10 points and we’ll monitor with an alert when the short call doubles in value. If it doubles in value, we’ll either roll that up 10 points or close off 1 call spread unit.
During the next 1.5 weeks we’ll be a bit more aggressive on upside adjustments. Why? Well Gamma starts to play a big role when we’re halfway through the trade. We’ll have an alert on when the short call reaches 1.5x value and we’ll close a spread. Our upside risks at this point will be drastically reduced. We’ll sacrifice a bit in whipsaw markets but we’d likely still end up with a profit at the end of the month. That’s the goal.
Upside is the toughest part of the trade to manage. It’s what crushed me in October. If I had managed the trade THIS way, I’d be out for a profit. I don’t necessarily hate how I managed October, it just turned the trade into a high variance one and that was not really the intent. It was the same way I managed the trade successfully before and I was profitable while other guys were -8%. I would push the upside with rolling calls (instead of removing them). It adds profit and for the most part, it’d work like 95% of the time, the other 4% you’d lose and 1% you’d get absolutely annihilated like what happened in Oct/Nov. The only way I would run into trouble at that time is if we broke all time records in all sorts of metrics, and if SPX marched 220 points in very short order, which it did :). It was the most pronounced V recovery. I think the market rose 220 points (SPX) in like 9 trading days. Annnyways, not to dwell on the past, but the changes above would allow for a much lower variance way of achieving similar results over time. It’d generate an average of 3% a month with a positive rate of 97%. It has been backtested with similar parameters in all market types since 2007. We’re going to manage the upside in such a manner that worst case we should end up positive regardless of how the market goes. The downside is/was easy for me to manage. I don’t mind downside/bear markets with the MIC. I successfully navigated the early October fall (10%) with ease. The upside is what ALWAYS hurt the trade with the way I managed it. I’ve given the trade a 2 month break and I’ve thought about how to manage it.
Adjustments on the Downside:
Like I’ve mentioned a few times, I used to manage the MIC like a job, I’d be making small adjustments throughout the trade and at times felt like I was playing the market like a fiddle. Eeking out 4%-5% returns until the small adjustments got me killed in October. There’s a trade off to everything. I am convinced normal moderate adjustments based on a trading plan is much better. It removes discretion, it removes yourself as an enemy and it keeps the stress low. This is how I trade now. (Well it’s getting better and better!).
Here’s some things I’ve found that I’d like to continue to explore
1. Instead of buying the monthly disaster (black swan) put (which loses effectiveness towards end of trade as time value shrinks and effects of Vega are reduced). Why not use long dated puts which are packed full of time value (and hence Vega effects are pronounced)? Then I thought, why not use the same disaster insurance method we use for the protector portfolio? It’s perfect. We’d likely end up paying for the long puts over time reducing the costs of the trade AND we’d be much more protected in any correction/flash crash or what have you. The risk profile with a monthly put vs a year put with increased volatility is astounding. The trade would always be profitable in a flash crash or large correction. Using the protector portfolio method of buying long dated puts (130%) and selling against each week (30%) to pay for it. Needs more exploration. On my list of to-dos.
2. On downside movements add butterfly spreads as a hedge method. We used to just add either a debit spread or a long put but a butterfly spread could be a lot cheaper. Obviously, there trade offs here. A long put will be very expensive in whipsaw but very effective if the market keeps falling. A debit spread is the second best, it’ll be less effective in a downward market than a long put but it still helps, and you can keep adding them with less cost if it ends up being a whipsaw movement. The next is a butterfly spread which is the least effective in a downward movement but much less costly and hence less harmful if a reversal should occur. So we have three things in our arsenal
1. Buy long put
2. Debit spread
3. Butterfly spread
On the downside, I’d like to adjust @ delta 25 for the first two weeks and delta 20 for the last 1.5 weeks.
How were my latest results
May: 5.69%
Jun: -2.65%
July: 1.01%
Aug: 7.24%
Sep: 4.8%
Oct: 0.78%
Nov: -9.7%
Dec: 2.01%
I skipped January and February.
November was a very difficult month. On the up trend I was rolling my calls forward on large up days. I started the trade when SPX was @1820 and it ended at @2060. If it was anywhere close to say 2020 or 2030, it would have worked out. But it didn’t. I find that lately anythign that can go wrong with a trade will often go wrong 🙂 In November it was this trade, in February its the TLT trade. Things often go way past what you think they can. It’s protecting against that and yourself and that is the key. I mean, hey, in November this affected my portfolio quite a bit but this month with the equally annoying move in the TLT trade, I am so diversified, that I am still up overall. That’s the key, diversification and proper sizing and proper allocations to a variety of strategies.