Things have been kind of hairy in the markets as of late if you haven’t already noticed. My trading account took a shellacking in the month of December after the relentless market selloff. My current positions are long stock and short straddles, so the down move hurt me pretty good in both cases.
Thankfully one of my buy-and-holds, ABBV, remained unchanged even after the NASDAQ had sold off over 10% in the last week of trading before Christmas. Overall my trading account lost 10% leading up to December 24th. The epic recovery that occurred the day after Christmas helped my account to recover pretty well, and I was only down 4%, but damage had already been done and my short 21 DTE straddles had to be turned into inverted straddles with 53 DTE.
Any time a trader gets stung like that they need to stand back and see if there was anything they could/should have done differently and what changes need to be made going forward. In my case what I should have done differently was to reduce my long delta’s. I am new to buy-and-hold strategies so my account has a lot more positive delta’s than my traditional “short premium only” portfolio, which I basically keep close to neutral (+/- 30 beta weighted SPY deltas). My account went into the December selloff with around 100 delta’s, many of which were static (due to my long stock positions).
What could I have done differently to mitigate this? In this case I had 2 choices, static or dynamic delta’s. Static delta’s by selling the SPY or dynamic delta’s by selling calls. It makes more sense to sell calls when volatility is high since the premium paid is so good, and that is what I should have done.
I (sort of) wised up and decided going forward I need fewer positive delta’s. It took me a while to get around to it but today I ended up selling a call in the QQQ. This dropped my delta’s down to about 55 (back up to 71 by EOD *sad face*). I wanted to sell 1 more call to bring it closer to 30 but there was one other problem, no more buying power! Nevertheless that 1 short call has already been pulling it’s weight as the NASDAQ promptly dropped by 1.5% after I sold the call, and over 50% of the premium of the call was sucked out by the EOD.
Moral of the story, have fewer positive delta’s as it will allow you to not fully participate in a crash.
If I would have added more negative delta’s I would have had a 3-5% draw-down rather than a 10% draw-down. Also, for crying out loud, get more capital in the trading account!