Rough Day in the Market 1/5/22

Definitely a rough day in the market today. The Fed minutes sparked real fear in the market and everything started tanking once the minutes emerged. I forgot about the minutes today to be honest. I would’ve likely held off selling some options had I known.

In my portfolios any time there is a significant down day they end up looking extremely ugly. In my short vol I was down 5.4% and in my personal I was down 7.77% for the day. So I ended down 3.56% and 3.84% YTD on the two portfolios respectively. Given YTD for SPY is -1.95%, I think it is okay. Of course, if the market drives further down the next few days there would be a bit of stress.

The reason today looked bad was that I had a few short deep in the money calls on SPX that gave me extra courage to take on riskier positions. Even though these deep in the money calls are great to hedge against drops in the market, any drops beyond what the strikes are we can quickly head into dangerous territory. I don’t usually close out positions quickly because I tend to wait for the volatility to play out. That has been a pretty good strategy throughout 2021 – and in 2021 there had been quite a few ugly days like these.

The rest of the week I will focus on protecting the existing positions by not selling more puts and rolling some SPX puts if necessary. Although I’d argue these are great times to sell volatility given the huge spike, I always end up in a bind where I’d prefer to protect my positions than to push to the limit. It only takes one weeklong blow up to wreck the whole year. Profits will always be waiting as long as you don’t get blown out of the game.

I don’t know if it’s a better strategy to just sit around and wait until volatility to spike to sell volatility either. Sometimes these spikes come few and far in between. You might end up sitting for quite a long time. The itch to trade and the opportunity cost of foregoing premiums while the market move sideways or up are high. I’ve been doing more of that in my retirement accounts. But boy, it is hard sometimes.

I’ll have another short recap at the end of the week. May Powell be with us.  

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