Hello from the future! Fascinating to read and understand the thought processes that were in place prior to Christmas Eve and the "excitement" that made everyone... or me at least... very anxious. But how did either of you, or anyone else reading this for that matter, negotiate the extraordinarily deep V bottom (with collapsing volatility)? For my part, I over traded, over adjusted, and got sucked into the vortex. (My trade was a beauty... or so is should have been: using futures options for margin leverage, I had a very very wide short strangle paired with a short call vertical, 28-32 dte). With the NQ around 6600, I sold the regular Jan (expy today) 7300p and the 6200 call 2x, covering one of those calls with a 6400c, collecting 1345. The original position offered no risk to the upside ( ~$800 upside profit on 1.5x
initial* margin of one short future). [* And there's the rub: span margining for futures looks to see what the max loss might be if there is an overnight move down [8%] and up [5%], so unlike equity index positions, margin requirements can and do change...].
On the way down, I butterflied away one of the short 6200 call, but as we saw, 100 points at a time was simply not enough. Relocating the remaining call vertical lower also helped, but with volty accelerating, there was nothing left except hedging the short put with a short future. Long story short (there were many chapters...), the trip back up was struggling to find sufficient credits on the call side (and raw fear stayed my hand on the short put side), so debit condors were used, but in a short covering rampage, even the sequence of condor, butterfly, condor* won't keep pace. (Call premia will be coming in, so you (I) end up trading closer to the money, with the result that the short covering rampage simply runs over you. At sub-5900, there was very little expectation that we would expire in January at 6800. Especially after the move from 6350 back below 6150 between 12/31 and 1/3.)
While I appreciate that Tom is sorting out how to maintain the forums and the website, I would guess there are more than a few shell-shocked option traders out there scratching their heads about how to better/best deal with an environment where realized volty has outstripped implied vol for weeks on end. It has to be particularly challenging as the net outflows (from the market) have been overwhelming net inflows. At the very least, the move to shorter duration fixed income has underscored the feeling that trading is not for everyone.
Regarding a possible "fix" to my trade above, I think a 'do-over' will include a 'mid-duration' put backspread. (Initial DTE was 36, so something around 14-20 dte.) Im thinking that the risk in the above structure was a serious vol pop from a crash, which would (and did) lead to significant backwardation. Had I put on a Dec31 put backspread where the sea of death was just beneath and to the left of the 'peak' of the p/l tent, I could have avoided a lot of agita, and possibly have taken some profits and let some of the storm pass.
Would love to hear/read others thoughts,
RJM
* (condor/fly/condor sequence)
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