Quote from noregrets:
Long the SPX Aug23/Aug30 1665 call calendar from 4.70.
In what will likely prove to be either a very smart move or a very dumb one, I added another 1-lot at 4.00. Edit: watching the index collapse after the close added a DITM SPY put as a partial hedge.
Out of 1 calendar at 4.70, holding the remaining one w/ the hedge.
Went ahead and closed out the complete position as it is basically at a scratch currently, my position has become almost entirely dependent on terminal distribution and I am not sure if this little rally can continue.
Some excellent lessons learned here. First, I probably should have closed the original 1-lot position earlier in the week. I put it on expecting SPX to quickly retrace part of its decline from 1695, which did not happen. However, instead of closing for a small loss I held on, and even doubled down just prior to yesterday's close. Unfortunately, the index dumped another few points right after I put the second calendar on, so I then put on a DITM SPY put as a partial delta one hedge. This backfired on me as SPX rallied hard overnight and through mid-morning, with the calendar up as high as 5.60 today, but I did not sell because I was only at a scratch due to my hedging loss. At this point I needed SPX to stay where it is or a few points higher for another day to have any kind of decent profit on the trade as additional time decay was needed to overcome my hedging cost. That doesn't seem like a good risk/reward to me so I closed for the small loss.
Key points I am taking away from this:
- Never hesitate to cut a losing position, especially a short vol one approaching terminal distribution.
- Don't overhedge.
- Hedging AFTER your position is in trouble is probably not a good idea since even if the underlying moves right where you want it to much of your potential profit may be eaten by the hedge unless you are able to precisely time the lifting of it. Hedging is an art and one about which I clearly still have a lot to learn.
- Don't become married to a position. This ties in with the first point, but after holding the calendar for several days with the market going against it I started taking increasingly complex maneuvers to try to save it. I should have closed it earlier and reallocated my capital, time and energy to another trade.
- If the market hands you a nice profit quickly after putting on a short vol trade, take it. Within half an hour after I put on the calendar at 4.70 it traded to 5.20, and it did it again the next day, but I held it as I was confident it would go higher. 10% gain almost immediately on a short vol position? In my opinion it generally makes sense to capture that and move on unless one has a lot of confidence about the future direction of the underlying.
Average entry: 4.35. Average exit: 4.80. Hedging cost: 1.13. Net gain after commissions: -.38. Return on risk: -4%.
