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.