Sep 19 – Trade Plan

The market may be range bound until the big two meetings on Wednesday (FOMC and BOJ). The gap up today was a bit of a pain to see but the market has now moved back into range and the pattern might even be suggesting a 3 step up that is bearish, further the double bottom intraday failed, again bearish, at least for today. Breadths are on new lows as well. There was apparently a new comment by a Fed with a different more hawkish tone?? I haven’t confirmed. Maybe we retest 2120 and relief really from there into FOMC?

I am contemplating exiting most of the SPX OCT trade as we’ve hit a solid 6% profit target and any outsized move in either direction would negatively affect the trade. We’re 32 DTE.

I checked the Rhino results over at Capital Discussions and saw that it’s single digits for the year. It’s at 6.92% since Nov where I think I’m at about 15% where we expect 5% a month. I am still ecstatic about the result. Almost somewhat giddy. I am being serous. Why? Because this period was the most difficult set of months for the Rhino to profit. This concurrent set of weak months are not matched in backtesting through to 2008. There’s been no worse time. It’s about as bad as it can get (short of some unhedged Rhino’s going through 9/11 or something). Let’s break down the year starting Dec, 2015. Keep in mind, From Feb 9 to Sep 1, we’ve seen a 34% move in RUT. I’ll always tell someone that this trade will not make money in a 34% move over 6 months 😉

Dec 2015/Jan 2016

The massive down move from Dec 02 through to Feb 9 was extreme (1204 to 946) = 22% down move. Rhino’s can handle these decently so long as the move isn’t a 5-6% gap overnight. It did handle it decently. My expectation is that a break even to slightly positive result is doable depending on when it happened in the cycle of the trade. If it was right at the beginning, you’d be hurting, if it was in the middle and you were diligent with rolling the structure down, you could have gotten out for a decent profit. That said, getting fills and rolling structures down could be very difficult to deal with especially if forced to do it in a fast moving market. I actually was slow to pull the trigger a few times and hedged with bearish butterflies. A mistake in my opinion. I ended up treading water around break-even until Feb 9 bounce. The bounce initially set up a lot of profit but the subsequent fire storm upwards took most of it away. From that point till about August, I was only slightly positive. When you see the following months, you’ll know why!

Verdict: Likely both months are break-even to slightly negative in reality. A No-emotion mechanical trader would make profit following the rules. I would make profit now. I didn’t at the time!

Feb 2016

The big bounce from 946 to 1100 was extreme and quick. It was almost unrelenting and I’d expect any trade in this environment to do around -2% or worse. It’s not an environment that you can do well in. The market moves ahead of your tent into a zone that is, at best, break-even to slightly negative. Theta kills and if you aren’t diligent in upside hedges, then you’ll get a losing trade. Remember human factors, the market is bouncing off of a huge low, you expect the bounce to retrace to test the lows, or at least do a partial retracement after such an aggressive move, the factors that caused the fall haven’t just disappeared have they? If You leave the trade on too delta negative expecting to do you upside adjustments on any reasonable pull-back and it never comes. You’re now down.

Verdict: Likely a -2% month

Mar 2016
This is another 4-5% up month. Again, VIX low, shitty prices on BWBs and a fairly big up move. I’d predict a break-even month. Maybe 1%. the 4-5% up move isn’t as much as the previous month and probably good enough for a very slightly positive result. Any trades entered would be at poor value (high cost for the BWBs i.e. @ 3.3-3.50 a pop) and these trades are affected by more up moves as you paid more for the BWBs.

Verdict: Likely a 1% month

Apr 2016

This is a 5-6% up month. Vix is Low, BWB have Shitty prices, and a big up move into May. I’d expect a break even month

May 2016

A challenging V-whipsaw month! The market moves down about 6% into May 17. IF you were lucky, you closed off some May expiry trades into expiry (unlikely you held that far into expiration). If you had June ones, they had 31 DTE by May 17, likely didn’t close those either. Maybe you hit profit target by May 17, doubtful, we paid way to much for the BWBs re the low VIX environment. The market then rebounded huge and any trades initiated or started around May 1-May 17 are now under water. The move was very aggressive.

Verdict: Likely a negative month..maybe some trades hit profit target and were exited?

Jun 2016

Nice decent decline into June 26, likely you exited some towards the end of the month or on the rebound post Brexit. I’d say possible to profit a few percent here if not 4%. If it wasn’t time to exit (very likely), you’d lose most of the profits on the way back up on the 12% or so bounce

Verdict: 2-4%

Jul 2016

Low vix grind up market move of 8-9%. BWBs very expensive, no pull backs, no relief, huge up move. If you’re slow to adjust upwards, you’ll get killed. I got killed in this move. I lost my Aug and Sep expiries by this low vix melt up that last through most of August as well. Very difficult month to make anything.

Verdict: -2%

Aug 2016

Low vix grind up market of 5%-6%. BWBs very expensive, no pull backs, no relief. If you’re low to adjust upwards, you’ll get killed. I got killed in this move. I lost my Aug and Sep expiries by this low vix melt up. Very difficult month to make anything.

Sep 2016

Not over yet, but we haven’t had a 5% up move, so that’s a positive 🙂 Oct and Nov expiries are all in the money profitable. Market has some volatility, pricing is good, we’re back to a more normal month since February. Possible to make some good % profit here.

So all in all, this year has been a challenge for the Rhino, done typically, it hates big up moves, it’ll get out of the tent and the trade all of a sudden becomes a challenge. How do you make money in front of the tent?? You really can’t and if you paid a high price (typical of Low VIX environments)..the BWBs will quickly lose value and you’ll be negative theta. Each cycle experienced a 6% up move and the entire 7 months from Feb-Sep experienced a 34% up move. The common-denominator to loss in these months are the viscous up moves experienced in each and every cycle (short of the Jan one which was in and of itself a huge challenging down month).

I’m ecstatic about the positive result because I know it’s about as bad as it will get over a 6-7 month period, I am not saying that some black swan event won’t come and be worse in a single month, I fully expect that, but I will likely have full hedges always on soon for any event that’s 8-12% overnight gap or flash crash. The point is, the market environment can’t keep going up 6% each cycle and when it stops doing that,this thing will fly. On the Brexit, when the market fell 5%, my balance skyrocketed almost 35% (it was huge, like 300k or something). A return to volatility and a return to mean reversion in 45 day cycles will equate to outsized gorgeous returns. Looking forward to it.