As per my post on the 8th of May
“There is three reasons why the market is likely to pull back.
1) VIX opened and closed above its Bollinger band. From Cobra: 81% chance of market revisiting the Apr 6 lows
2) The RSI made new lows and hasn’t show positive divergence. Down momentum is strong
3) The last down leg exceeded the 100% measured move which usually means another leg is likely.
What’s my plan? I’ll probably adjust slightly on any big bounce to make sure my deltas are zero to slightly positive.”
We did have a big bounce but it was so big I actually couldn’t adjust in favour of any perceived pull back, in fact it was so large, that I had to adjust a bit on the other end! Yesterday we started to see the pullback and today the futures are down almost 20 points from yesterdays close. There it is I guess.
Will a large gap down affect any of the current June trades? No, not really. The RUT trade will actually end up exactly at delta neutral and the SPX trade will end up at about delta -10 to -15 from +10-+15. The volatility will increase making everything expensive and anyone trading these types of strategies have to expect their broker balances to dip. Not to panic, it’s mostly superficial. It’s increased volatility which piles into the options you sold, making them more expensive to buy back. As well, during panicky days the mids get large and you’ll tend to see wild swings in your net liquid. I’ve seen my balance swing by 50k from open o close with no movement in the underlying. It’s all re volatility and inaccurate mids. As long as you adjust at the appropriate delta, all of this volatility will seep out as time goes on and you’ll end up fine.
Oh, the March trade did 5.7%, didn’t have the best luck closing what was left yesterday.
As for the protector alpha, I lowered overall exposure just a bit more yesterday. Good timing apparently.