Vol trading Update II
This is an update to a previous blog post here and boy is it a doozy.
So the obviously the draw-down looks ugly and awful. And it is, there is no sugar coating it. But in any draw down there were some great lessons to be learned. As tensions in the euro-zone grew in early May, for what was at the time the 3rd such flare up in as many years, I was under the impression that this event in particular would be minor and it would be hard for the market to sell-off as violently as last summer. My thought was an election year is usually bullish and that there was no way Wall Street would be caught off guard two times in a row to the same catalyst. Well, I was partially right and partially wrong. More importantly to me was a clear breakdown in discipline as I’ll show in this chart:
My model very blatantly told me to hedge short vol positions, if not go outright long vol. I, on the other hand, decided to trust my intuition and opinion and short more vol. This was wrong. It’s ok to have an opinion but one needs to follow their edge and have the discipline to stop out. Needless to say I suffered a lot of pain. Then, rather then holding my position I quickly reduced the position to a fraction of the initial position thereby only recovering a small part of losses. It wasn’t till 3 months later that i was making new equity highs with this strategy.
On a final note, which i contemplated not including, the chart of P&L is further distorted with changes to my account. My capital allocation was actually doubled in the beginning half of May, coincidentally right when European issues were flaring up . As such my initial position was roughly double then then previous 5 months. So on a percentage basis, the draw down wasn’t as severe as shown on the chart but this business model is based on dollars, not percentages.
So in the end, a valuable lesson learned, and unfortunately one I thought I had learned in the past. It’s a game of minimizing mistakes!