Quote from Rearden Metal:
Quote from Blotto:
Would this make sense at this part of the cycle?
--->Now that spooz are down huge overnight, the calls/hedge was probably an unnecessary waste of money. <b>Now</b> we know that. Before the big gap down open revealed itself, things were far less clear.
it seems a lot to pay to protect against an event which is very very unlikely here.
--->NOW we know that. Before spooz sold off huge overnight, there were two possibilities in my mind: UVXY increases in value by 10% to 20% by Friday, OR spooz rip straight back up. <b>Now</b> we know which one is occurring. Before spooz sold off? Not so much...
Excellent thread so far, and kudos for posting your calls in real time. I appreciate that my questions might have come over as "Monday morning quarterbacking" now that the market has continued to move down.
Quote from Rearden Metal:Does the trade make sense yet?
Sure does: your position is either that there is no way to know definitively that the market would not go back up, or that there was no way to know with sufficiently high probability that it would not.
We can all be smart in hindsight, and any insurance purchase looks like a "waste of money" only after the insured event failed to materialise and the premium has been paid. If the black swan does appear, the insurance can look "cheap" and the decision to purchase it sagacious.
Certainly you can trade around your position to take the minimum loss on the calls and the maximum profit on the long volatility position. Thanks for your reply about the various options to manage the trade, particularly that there is no need to lose 100% of the premiums. However, for those following the thread who are likely far less skilled with managing positions, it might be interesting to determine whether the insurance purchase was necessary at all, or whether it contributed to providing a better risk adjusted return than would otherwise be available.
While I agree that we cannot be 100% with our calls, and there is always the risk of the market doing something we did not expect, I would say that we could know in advance, with high probability / confidence the likely outcome. I have given some of my reasoning: if the market has been going up on weak demand, and we had aggressive profit taking against the last of the new buyers at yesterdays highs, and the market has fallen off the high towards areas where longs can be stopped out and short traders can look to enter the market - then where would the new buying come from to give you any heat on your position? At this part of the cycle, fear is taking control with dip buyers being reluctant to enter, and plenty of nervous longs who entered towards the end of this rally looking to cut their positions if the market does not rally. The bears have been so thoroughly squeezed that they are in fear of entering short again until the break is "confirmed".
I think it can be known in advance with a high degree of certainty that the market was unlikely to move sustainably against your position. Others may of course disagree, and I'm perfectly happy with that as differing views make a market. However, it was intended as a prod to get folks to consider how we can calculate our odds in the market. Surely every trader starts with the premise that an event is "more likely than not" before putting on a trade, or alternatively that the prices the market offers do not accurately reflect the probabilities of all the possible outcomes. If not, how would there be any value to be had from trading?
So is there a way for traders to have a better understanding of the true odds of the market moving lower / higher from yesterdays close, before it occurs? We can all "know" in hindsight, but knowing before the outcome develops (with high probability) can be the difference between making good money and making great money. If the true odds are understood, then this can govern position sizing, position management strategy, and whether to buy insurance.
Just some thoughts. While we cannot have certainty, we should look to improve our odds as much as possible. I screwed up on a trade the other day and what I learned from the experience makes it considerably less likely that I'll make the same error again. Sometimes we can learn as much from what the market doesn't do as what it does. In this case if it does not rally, and we can work out why, then we've improved our profitability the next time this condition occurs.
