Tuesday, October 04, 2005

Volatility!

Wow! What a move!. With the market so strong early in the day, I was pleasantly surprised to see that I was moving into new all-time highs for my portfolio. These gains came despite a large short position in the October 120 SPY calls, that I built up into last week's strength. Early in the day I benefitted because tech was much stronger than the market as a whole. My long-term portfolio is overweight in tech, and has slightly positive gamma. Even though I was taking losses in my large (large for me) SPY short, the gains in QCOM, QQQQ, LU, more than made up for the losses in SPY which surprised me. Oil moved down quite a bit today too. The OIH was down around 2 to 3 bucks early in the day. This was also probably helping to hold the SPY back, since the oil sector has become a larger portion of the S&P over the past year or so. The oil pull-bakc further mitigated my losses in the SPY short since this was taking OIH closer to the center of my 130/125/115/110 iron condors.

But if I thought things were going great when the market was going up, the portfolio really started to rocket when the market began to tank and my short SPY position started to kick in. I like to think I learned a lesson last week. I had the oportunity to hedge some of my upside risk in the SPY today and I took it, unlike last week where I had opportunities to reduce risk and I didn't. (In fact last week, I doubled up instead.) I turned my short SPY OCT 120 call position into the 120/123 call 2:1 backspread by buying some OCT 123 SPY calls in the last hour of trading. Now I am in that backspread at a pretty good price. More importantly my total position in SPY (I have other SPY option positions besides this backspread.) is now long gamma in both directions. I am still leaning strongly to the short side though.

At the end of the day, OIH really started to tank. It was down like over 4 bucks, and was now past the midpoint of my 130/125/115/110 iron condors. I legged into this IC position during the hurricanes for a debit of around $0.67 (including commissions), and was quite pleased with how I legged into it. It had a maximum profit potential of $4-something and a 10 point range over which the maximum profit could be made. Today the position was profitable for like 2.87. When OIH really tanked at the end of the day, I bought back the 115 put (for a profit). I may have panicked a little bit...I now have a bearish position in the OIH. Hopefully I can do as well of a job legging out of the position as I did legging into it, and maybe increase my profit...but I fear that after a move like today it will come-back some, and I may give back more profits. I just couldn't bring myself to close out the whole thing for only $2.87 today.

I think my fear with the OIH was this: I'm not sure if I believe the widely heald view that last week's broad market strength was purely end-of-quarter window dressing. However, I do believe that the strength in OIH last week was window-dressing, and I was very concerned about losing my profits to more downside movement in the OIH.

I need to be especially careful now though. The times when my portfolio is at highs are always very dangerous for me. The temptation to over-trade is great. Making money is intoxifying. It can make you feel like a genious who will never make a bad trade again.

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