Largecaptrader.com

Readers should know by now I am a fan of short volatility strategies in a risk defined manner. Despite having defined risk, the P&L on adverse volatility event can be quite substantial! Last week we saw an explosion of IV and RV that we haven’t seen in awhile:

10 & 30 Day RV and ATM IV in SPY

My P&L gyration was wild to say the least. My position was short SPX OTM puts hedged via short SPY. During the 40 handle sell off on Monday I was selling SPY all day and doing an OK job of hedging, not great but negative P&L I could handle. Then as news of the Boston explosion came out, VIX and IV exploded and my negative P&L basically multiplied by about 5x in the last half hour. My equity curve looked like a disaster, almost wiping out ALL my gains YTD in the strategy:

YTD Vol P&L to 4/24/13

This is MtM DAILY P&L, something you probably won’t see at any hedge fund and certainly not on a CTA Monthly performance schedule. Most funds only report End of Month, or perhaps End of Week P&L which can hide these daily gyrations. It may be considered unscrupulous however a big portion of the P&L is the end of day mark. Which as you can see, quickly reverted the next trading day. So does it make sense to present to outside investors who might panic? Luckily my investors sit very close by and I was well within my (newly expanded) risk limits. That’s also a partial explanation for the magnitude in dip relative to previous months, my position size was larger due to increased capital. Additionally, this only represents P&L in one strategy, the draw down in overall P&L was much less pronounced. Interestingly enough, the last time I had capital boosted was right before last summers’ European crisis, something to consider for the future!

The market rebounded nicely and I was able to make new equity highs reasonably quick. In fact, had i not hedged at all, I would have been flat the SPX position the very next day! The end result, despite what I consider a C+ grade in hedging via SPY, a small bounce in market was all that was needed to regain all lost equity. Considering the magnitude of the move, ~40 handles in S&P and ~50% movement in VIX, the amount of loss relative to my risk limit (not even 40% of allowable limit was hit) I consider it a pretty decent job. My “risk” model is still positive and I will continue to trade SPX, VIX, VXX accordingly:

Still LONG biased for now

Posted in Performance

It’s that time of year again and I’ll keep the structure similar to 2011:

Note – All numbers are after fees. Rather large commission fees I would add….

The Good:

- I ended the year in the green thanks mostly to a successful risk arb in NXY that hit in December.

- Volatility Trading was a bright spot in the book and despite some Draw Down during the summer euro crisis, the remainder of the year was excellent. I wrote more about the specifics of the performance here:

- I received a capital bump for 2013 with a proposal for further capital dependent on Q1 performance. We will be moving into new offices as well shortly which should have some pretty nice perks.

The Bad:

- Although the year ended in the green, it was only marginal in that direction. Not only that, it all occurred at the end of the year and with a large amount of volatility.

- Numerous portfolio allocation decisions proved to be quite poor at certain periods of the year. It’s my goal in 2013 to do more of what works and less of what doesn’t.

The Ugly:

- While Risk Arbitrage and Volatility Trading were profitable, Statistical Arbitrage and Discretionary Stock picking delivered a negative return. In particular, TSO – VLO spread, JAKK tender offer, and some other “special situations” that didn’t work out contributed to the losses. As any good trader has done, I’ve thoroughly gone through the losses and it basically boiled down to position sizing. Losses are a part of the business but these represented large outlier losses.

Posted in Performance