A rotten day for the market and the butterfly gave back a little from Friday's gain.
The position Greeks are within my comfort zone. 32 Delta's long, 2 Gamma's long, Theta of 59 and a vega of 270. A one day, one standard deviation move for the RUT is approx 10 point and a 2SD day is 20 points. So if tomorrow again a down day, we can expect to end in between 32+(10*gamma) and 32+20*(gamma). This is a very rough calculation since gamma is not static and increases when we move to the lower Break even point. For a position this size I start "worrying" about the directional-greeks (delta and gamma) when I get close to 200D long or short. The above rough calculation, with all it errors, shows that in normal circumstance I should be able to sit on my hands. (which can be difficult enough by itself).
The Implied Volatility - burned into my screen by monitoring the vix continuously - is still not signalling a big break in the market. This the main reason I have not (yet) hedge the RUT vega's with a time spread in the RUT. I do have some time spread in other vehicles. So on a portfolio level I have a (small) hedge against the short RUT vega's.
An other reason I haven't hedge the short vega's has to do with the "vertical volatility skew". I leave that topic for now, you can give it some thought, I will get back to that tomorrow.
I close for today by answering the outstanding questions.
Senco -- that is a good summary of my trade-plan. But don't forget that I said twice my profit potential only in situation of severe market stress and personal errors. With an ATM butterfly on the indexes I "play" the odds that this month will show a normal distribution. This is one of things I monitor by checking how big the daily moves are in terms of Standard Deviation. Another thing I monitor is the VIX. If the combination is showing that my axiom proofs to be false then I bail, take my loss and wait for the next month. My experience is that a "normal' loss in a month were it just doesn't work, is closer to 1 times a normal months profit.
BTW my personal errors in this regards are over-trading, anticipating a market direction and not obeying my max loss rules. When you are doing this for several years in the end you will have seen them all :(
Ken, I am kind of hoping not to show you that this month :).
One line of defense is that my initial position is only half of the money I am willing to put at risk. So if we move closer to a break-even - I will contemplate to add an extra ATM butterfly. Another action could be taking of step by step the 770-820 spreads. This reduces the downside risk and normalizes the position greeks. I am more inclined to do the first (adding) when me move to the upside break-even and the latter when we move to the downside break-even.
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