Wow, what a day in the markets. It was one of the worst days of the year. The SPX fell 2.5% from peak to trough and the VIX surged 25%. Something you don’t often see is the TRIN exceeding 3. The Trin measures the advancing vs declining issues in the market. When it’s this high it usually signals a reversal on oversold conditions. 7/8 times it’ll reverse. Though it can also signal a big fall (2008/2011).
The volatility increase caused a temporary loss to our MIC. As volatility surges and unsurity increases, our way out of the money credit spreads increased by probably 3-4 fold. We’re still a very far way away from our spreads so we’ll just keep adding debit spreads until Monday if the market should continue to fall. Volatility will have less and less of an affect as we’ve only got 5 trading days left in the month. It’ll quickly dissipate and resolve and all the while our theta is very high. We’re likely holding till Monday unless we have a huge up day on Thursday or Friday along with a volatility collapse. Managing risk over the weekend is key. We’ll want to make sure our delta’s are close to even and make sure we’ve got a nice long range. We’ll let theta and vega work to our favor. As it stands now, our curve is quite safe and our deltas are just slightly positive. All in all a great position to be in. Both our debit spreads and the credit spreads should profit resulting in a nice gain on the month.
I took the down turn as an opportunity to sell some of my year out puts used in the Anchor. This is in prepration to rebalance for our January trading portfolio. It would seem I was a bit premature. I sold about 10% of the puts at 205 and the spy reached 202.98. Ah well.
Today I’ll be just managing our deltas and make sure there is no great exposure. I’ll be on high alert today.
Update: A market breadth indicator I use has triggered a short at spy 205.4 with a target of 204.9. I’ve sold 2k shares of spy and put an auto close at 204.9. These trigger probably 25x a year and are good for about 25-30% return unleveraged. They usually trigger 5-10 min after market open.
**Update 2** I closed at 204.92 and we made out with ~1k profit
I’m in the midst of rebalancing for the month of January.
I’ve decided to do
25% Modified Iron Condor
25% TLT/SPY Pair Trade
I’m overbalanced in MIC and waiting for the Dec trade to close this Friday or Monday (latest). I expect to do about 5% on that trade. Once this closes, It’ll release a lot of margin which I’ll use to enter momentum, another MIC and the rest will be dry powder for the next TLT/SPY pair trade.
I had a margin issue yesterday that imbalanced me on the anchor trade which I have to correct. It’s an issue of being over leveraged without accounting for large volatility increase which can throw off the portfolio margin calculation that occurs every night. The solution! Less leverage! There’s nothing more stressful then being caught up in trying to become compliant during the first 15 minutes of trading. It throws everything off. You end up chasing to correct offset the entire day. Won’t happen again.
Right now I am in the TLT/SPY pair trade, over balanced in the MIC trade and slightly overbalanced in the anchor trade. The MIC overbalance will be corrected within the next 2-3 trading days as we exit the position.
I figured it was about time to start sharing some of what may be an unorthodox lifestyle. I do a lot of traveling and a lot of trading. This blog will document my trades and at times my travels and the challenges therein.
I typically follow a non-directional trading style having mostly traded a few strategies
1. Modified Iron Condors (MIC)
2. Earnings related volatility trading
3. Fully hedged Anchor strategy for a long term portfolio
My focus and research/backtesting has been focused on how to maximize leverage in a safe/conservative way. I’ve determined that non-directional strategies tend to work best for this.
Modified Iron condor (MIC)
The MIC is a non-directional strategy where you sell both ends of the spectrum and buy insurance in the middle. Essentially, you’re a market insurance salesmen. The upside is usually the biggest problem with the MIC and the anchor likes up, so they tend to hedge each other. The EV trading loves volatitlity increases and helps on the down as does the standard adjustments you’d do in the MIC. Down and up are generally covered.
Recently, I’ve decided to further diversify and am doing somewhat equal parts of MIC, Pair trade credit spreads of TLT/SPY, LC 15M (momentum based trading style based on Meb Fabers research), Volatility trading and finally the Anchor strategy
2. TLT/SPY Pair trade
3. LC 15 M (Momentum)
4. Earnings volatility trades
5. Anchor Strategy
My belief is that this will end up in a very well rounded leverage based trading portfolio.
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