We are all waiting for the bounce, which seems not to happen right now and here. The vix spiked (a bit) in the last half hour. In the afternoon the RUT broke out of the day-trade-range. Both not really positive signals.
I was sitting on a small profit. With the jobless number coming out and the position so close to a first adjustment. I decided to pull take the (small) profit and run. $375 with approx $8000 in risk makes 4% in 7 day; not bad for a trade that got quickly into problems.
The decision came in two steps;
On the first graph you see the untouched position (simulated)
On the 2nd graph you see the position with a time-spread 790 Jul/Aug which I added around 1pm.
The time spread was a vega hedge cutting the vega in half. If the bounce had materialized during the afternoon hours, the calendar would not lean (too) negative on the fly. All in all a position which I was willing to hold overnight, till the break in the trading range happened.
Then I decided to pull the (iron) butterfly. It is still 37 days till expiry, so I have at least another week to see how the market develops and to re-enter on a hopefully better stop. So for the time being I am left with a time-spread which you can see on the third graph.
I have to admit that not all the decision making is mathematical. I got my biggest draw last year when QE1 ended I haven't forgotten that experience and I play the end of QE2 extra careful.
Yesterday we changed the butterfly into a calendar. A calendar is a lazy man's trade. It doesn't need much attention intra-day. If anyone is interested in trading more with options, I would really recommend starting with calendars. With a proper selection of the underlying and a correct execution, its is relatively easy to bank 10-15% on capital @ risk over a 30-60 day period. In the future I am happy to go more in depth.
During the day I had an order to enter a new fly 750/800/850. I had priced my order sharply, so in the end no-takers, which is okay. I have a couple of days to see how the market develops.
I re-entered the iron butterfly centered around the 790. No regrets that I side stepped the market for a couple of days to see how things are developing.
The margin on the butterfly is (5000 * 5) - (3100 * 5) = $9.500. My goal for this trade is 20%.
Nearly perfect in the center. Greeks for the position are nicely under control. I like to have short delta, especially in a vega negative position. This way if we go down my short delta's and the short vega's will compensate each other (for awhile).
Let's focus today on the size of the move in the RUT in term of a standard deviation. Check Wikipedia for Normal distribution curves, and for the chance that a move is 1 standard deviation and 2 standard deviations.
To calculate the size of the expected move based on the implied volatility you can use the following formula.
Underlying * IV * SQRT(time)
So for today's move in the RUT that is
777 * 22% * SQRT(1/365) = 8.94. The RUT had a 17pnts move, so today was a 2SD move.
For a week that is
777 * 22% * Sqrt(7/365) = 23 pnts
By itself a 2SD move is not a problem for my trade. I get frustrated when they come frequently and especially when they come frequently in the opposite direction.
I finish off with some good sites for option education.
There are expiration months that by now i am done and can start closing the position. For July that is not the case. The position had a good day. We had a little progress, what considering the market is stellar.
My downside adjustment point is still 20 point away. I should be able to walk away from the computer with an alert to my cell phone 15pnt under today's close. Theta will take care of itself.
I truly hope that none of you got hurt by this enormous chop. With a vix climbing, triple witching on Friday, the end of PoMo, I can only say "Be careful out there, surviving is the most important thing. That way you can play again when this volatile period normalizes"
The VIX keeps moving up and by what ever method you use, you will have to conclude it is in a uptrend.
For me a VIX crossing 22.50 is an important point. When we are over 22.50 and I don't see a downtrend I will no longer trade in a "Business as usual mode". I reduce risk and stop entering new positions and necessary adjustments are risk reductions. Check a Long term VIX chart, VIX above 22.50 doesn't happen to often and it tells you some big parties are expecting that "anything" can happen.
For my trade style when the chance that "anything" can happen becomes real, I need to move to the side. My profit goal for the month is no longer valid and not breaking anything because the main goal.
Allow me an anecdote. I am a sailor, I have crossed the Atlantic several times. On time I left solo North Spain, heading for the UK and Holland. 40 hours out, I was hit by a big storm, my first one solo. I was well prepped. Clean, well maintained boat. I reduced the sails, I locked the rudder in a safe setting, closed the hatches, set the Radar Alarm against other ships and went to sleep on the floor of the main cabin. I had a great nearly 8 hrs sleep. The next morning the storm subside and I continued with my journey.
To me that is what a VIX 22.5 is a storm warning, some hit you, some pass by on the horizon, some never show up.
Most of my accounts only have the Fly/Calendar combination and have only 25% (or less) account value committed. So I am in a good spot.
If you check the greeks of the position below; you see the trade being nicely neutral. Again I am in a good spot.
yesterday was painful day. What ever I had already gained, I had to give back. Never a nice thing to do.
I have two graphs. The first is the position as it is, the second graph includes the adjustment I am considering. I am looking at moving 2 call spreads from the 790/840 to the 840/890. The benefit would be a reduction of my delta by approx 50%, while maintaining theta. Both positive, negative would be an increase in Vega and Gamma.
I haven't entered the adjustment yet, by pure objective trade rules (mostly size of delta) I am close or even a little passed that point. I decided to wait for today's open, expecting some weakness before the FOMC.
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