These are the times that try a neutral trader’s soul. It’s as if some jokester has gotten hold of the market’s wheel of potential scenarios and ripped out all but the most bullish of spokes. Nothing like an 80+ point rise in eight days to knock the socks off the everyday condor and butterfly trader. For you non-directional players seeking solace I offer up one helpful observation: It could be worse. At least implied volatility isn’t exploding. You think an 80 point rise is bad, try sitting through an 80 point drop while the VIX is tripling.
Those who have been praying for mean reversion in recent days have been answered with utter silence. Zip. Zilch. Nada. Apparently the mean reversion god has taken a vacation. Dynamic delta hedging really starts to look appealing in times like this. Those who have made adjustments early and often are reaping the rewards to their active management.
Selling far out-of-the-money, high probability credit spreads and simply letting them ride has the tendency to make you feel like a genius 80% of the time and a moron the other 20%. Unfortunately this month is proving to be the latter for most traders. A month like this reveals the efficacy of the neutral trader’s plan to minimize losses. If you only gave back last month’s gains, congrats. If you gave back the last four months of gains then your risk management rules are either nonexistent or poorly constructed. So figure out what’s wrong and fix it.
I dare you.