Monday, January 3
Happy New Year! I hope that you and yours are safe and warm.
The first day of the new year was quiet for me. I was busy with other projects and feeling a bit sketched out by the market, so I decided to take it slow.
$SPX
My only trade of the day was this RS+ in $SPX, which I entered early in the afternoon as price held weekly HB and the hourly bands began to curl. This was a looser setup than I like, but I kept the trade small and structured the spread with a bit of extra time, some positive theta out of the gate, and relatively low delta.
Volatility got whacked, otherwise this spread would be trading about 50% higher, but that’s okay. The RS+ holds up to vol drops much better than a time spread. And if $SPX chops around 4800-4850 for a while, this will pay nicely.
If $SPX loses the rising hourly bands, I’ll close this trade. If $SPX sets up bullish on the hourly, I’ll look to add deltas. And as this trade works, I have standing limit orders to roll up the 4780 call whenever I can get at least $4 for the next $5 spread.
For tomorrow…
My lack of preparation caused me to miss a great setup in $AAPL. I’d love to get involved on an open around the HB of today’s wide-range bar, which will be supported by the rising hourly bands.
I’ll also be watching $GS and $TSLA…because I can’t help it.
Tuesday, January 4
Today wasn’t a great day for me, but it highlighted several lessons that I need to internalize this year.
$SPX
I got shaken out of the SPX position I established yesterday (see above) when we closed a fairly aggressive-looking hourly bar below the hourly bands. I got out for a small profit, so I was happy that I protected my original risk, but I never should have exited that trade–certainly not where I did.
Ideally, I wouldn’t have allowed the position to come under pressure because I would have hedged it by adding a short position on top of it when the bulls showed their weakness in the morning. But I was distracted and missed the correct entry for a short and didn’t want to enter late, which would create too much risk in the “hedge.”
Having failed to hedge the position, I at least shouldn’t have existed where I did. Basing my exit on the hourly bands was a mistake because they had just been oscillating for days with price regularly trading on both sides. In that environment, I should have been focusing on key levels, not the bands. And I exited the position right as price was pulling back into two major levels of support: (1) the HB of the prior day’s bar (which was 3u, so very strong), and (2) the weekly HB. Unsurprising, price bounced strongly from there.
$TSLA
On Monday, $TSLA gapped up huge and ran to 1200 on positive news. I didn’t trade that move, but I was watching today to see how $TSLA reacted to Monday’s range. If it showed strength over Monday’s HB, I wanted in. $TSLA opened in the upper third of Monday’s range and quickly broke above 1200 and Monday’s high. Other vehicle manufacturer stocks were ripping.
Vol was elevated and the stock was whippy, so I didn’t want to buy vol or pay a large debit. I decided to sell a put credit spread down at 1120, expiring Friday. 1120 was below Monday’s low and several other areas of support. 1100 would have been a better choice, but if $TSLA was strong, it should not have revisited 1120. Well it did. I basically bought the top as the breakout quickly failed and $TSLA dropped 80 points over the rest of the morning. I should have exited as soon as price moved lower off the HB of the opening range, but I held on.
I was pleased that I didn’t panic sell at the bottom and instead waited for the bounce. Then I hedged the position by buying another credit spread for a much higher credit than the first one and then buying butterflies over the 1120 short strike. This added some debit to the trade but stabilized the gamma a bit by building in upside between about 1110-1130. I like the adjustment, but I shouldn’t have put myself in that position in the first place, especially given the uncertainty around FOMC minutes tomorrow afternoon.
Wednesday-Friday, January 5-7
Well that was wild end to the first week of the year. When the whole market melted on Wednesday, I was caught very offsides in several complex, long-delta $TSLA positions. But what could have been a very bad week for me ended up being one of my best weeks of the past year. I won’t even try to summarize the trades. They had way too many moving parts and, frankly, weren’t very “Vega Options.” [Basically, I closed the underwater short legs of several put credit BWBs, too profit on certain long legs, and then re-established new, bearish, zero-cost positions around the remaining long puts.]
Instead of going into the details, I’ll leave you with a few lessons.
- Don’t initiate trades that you cannot afford to close. At all times, you must preserve your ability–and intellectual willingness–to liquidate a position the moment that the setup that got you into the trade is invalidated. If any aspect of the trade would prevent you from doing that, be it the spread, volatility, PDT issues, and the like, don’t do the trade!
- Whenever possible, don’t hold marginally profitable positions overnight or into major volatility events. Unless your theta so outweighs your delta and vega risk that you can afford to wait out a violent, adverse move.
- Know your open positions inside and out. And have hedges planned in advance. The goal is to identify all reasonable contingencies (i.e., minimize “unknown unknowns”) and avoid having to improvise.
A final suggestion: Make a habit of tracking your complex options positions outside of your broker platform. Do it in a spreadsheet or in a notepad. It can help you verify the records in your broker platform–vital when your platform glitches (and they all glitch sometimes). It can also help you to understand your risk positioning at a fundamental level and adjust quickly when needed. This page may look like chicken scratch, but it literally saved my week this week.
