Project Leiden (update 3)

[  trading  high-volatility  ] 06 May 2020

It’s been an interesting year in the stock markets, to say the least. Leaving the comedy aside (fundamentals don’t matter, printer goes brrrrrr), the basic change has been in the volatility landscape: from a very sedate VIX <15 until mid-February, to >30 for the foreseeable future. A lot of market actors are spooked, but the Fed will likely continue to intervene massively, so it’s reasonable to expect IV higher than actual volatility in the coming months.

In brief: time to sell premium.

Example: MU butterflies. MU is a solid company, not in danger of going bankrupt any time soon, with good volume, trading between 30 and 60 for the past 3 years. During March it hit 36, and it’s relatively unlikely it will drop to that level quickly again (within 1-2 weeks).

Long butterflies a week out, and the potential premium gain is pretty close to the capital at risk, with a relatively wide profit spread. Right now things look good if it stays between $43.28 - $48.72 (if centered at $46).

Of course, the market could crash at any moment, so hedge with a $46-$43 debit put spread 2-3 months out. Suddenly you’re in the green if the stock stays anywhere under $48.72 for the next week.

If it moves higher, sell at your preferred stop loss, try again a week later. (It’s very unlikely MU will shoot up and stay up in this environment.) If it moves lower, use the hedge and wait until it bounces back up to enter new butterflies.

MU could run up, of course, so the portfolio should be diversified between many such stocks. Then the only way to lose would be if the entire stock market keeps breaking all-time highs over the next 3 months.

Given the recent actions of the Fed, possible! But I’d bet against it. I’ll be long butterflies for the foreseeable future, hedged mostly to the down side.

Project Leiden (update 2)

[  trading  earnings  ] 23 Jan 2020

My (paper) portfolio has been swinging wildly over the past few days, meaning ±3% in 30 min (which may not seem like much, but it is made up of lots of small positions, and hedged, amateurishly but still).

I’ve been trying to figure out if there’s a way to hedge for market gamma and read up things on spotgamma.com. It seems that I’ll need to change my trading plan, currently based on selling premium on auto-pilot (not going too well - relatively high volatility keeps triggering my stop-loss orders). And choppier seas ahead, it would seem: Super Tuesday Hedging Already Showing Up in Volatility Curves; and some fun analysis here.

What I’ll try to remember is this:

“The recent passage of options expiration “will make the markets more prone to momentum moves, on the margin,” conclude Middlebrooks and Sanaullah, who believe the odds are rising for a tactical correction in which equities “take a breather” until the second quarter.”

I’ve done some rudimentary gamma hedging by purchasing puts here and there, on whatever positions I thought it made sense. Let’s see how that turns out.