“Just how deep do you believe?
Will you bite the hand that feeds?” – Nine Inch Nails

Had to severely amp up the music selection for this one.  Wow, what a crazy few days in the market.  The type of market movement that only happens every 3-5 years.  I think Clark Griswold said it best – “I wouldn’t be more surprised if I woke up with my head sewn to the carpet”.

Interest rates started rising last week, then came the jobs and wages reports, then all hell broke loose.  Unless you were positioned as a bear or completely out of the market, you probably lost money over the last few days.  Most of the time, the best thing to do is sit tight and don’t sell at the bottom as these sort of flash crashes do happen and unless it’s something major things usually get back to normal in a matter of weeks.  I don’t consider modest rate increases and extremely premature concerns over inflation major.  Yes, the Fed is rolling off some quantitative easing.  No, the economy is not going into a recession over a few small rate hikes.  So I did use the opportunity to add to a few equity names I’m starting to build positions in.  It was like a Kmart blue light special – too good to pass up.

For my options trading – Friday I closed out of both my butterflies in SPX and RUT.  Even after making adjustments to try and save them, my exit rules hit and it was time to close them down.  Trade 18 on the RUT was closed for a 6.7% loss and trade 19 on the SPX was closed for a 3.5% loss.  I could tell Monday was going to be ugly so I didn’t add any positions and went into the weekend with only my Crude oil trade open.

On Monday panic set in during the afternoon as the market continued south and buyers were nowhere to be found.  After hours trading is when things really got crazy as volatility continued to spike and one of the short volatility funds that I’ve traded recently started collapsing.  These volatility funds escalated the selling as the companies that issued the funds were forced to buy volatility to cover their losses.  This sent the market completely off the rails and caused the final leg down.

There is a lot of speculation on what will happen to these funds going forward as clearly they weren’t able to hold up through this crash.  My guess is even if the XIV and SXVY both get shut down, traders will still use the ZIV or another instrument to short volatility since it’s a good trade most of the time.  Although I had no position in any volatility instrument at the time, it was a good reminder to position size appropriately for these trades and monitor closely.  I’ll be reducing my allocation for volatility trading going forward and may look at using puts on VXX instead.

Monday evening the fun continued as traders around the world were glued to the futures market watching the S&P and Dow futures continue to sink like a stone.  Technical traders expected the 50 day moving average to hold and it didn’t.  Finally the price met some serious buyers at the 200 day moving average – I think most believed this was the line in the sand.  Once I saw the buying pick up a the 200 day, it was time to make my move and put on a broken wing butterfly on the ES (E-mini S&P futures).  With volatility at extreme highs, I was getting paid a credit to put on a trade that I would normally pay a debit to put on.  The butterfly is ridiculously wide due to implied volatility and I have no upside risk since I got a credit.  This will be a very quick trade.

Below are my current positions.

ES (Trade 20) – March expiration and strikes at 2625-2510-2270.  I’ve had this on less than 24 hours and it’s already up 11.7% due to the bounce in the market and the drop in volatility.  I’ll most likely be closing this tomorrow if volatility drops some more.  Profit tent is incredibly wide.

CL (Trade 16) – April expiration and strikes at 64.5-62.5-59.5.  Currently up 2.1%.

Volatility – No trades at the moment

As a trader, the last few days provided great experience riding through one of these crashes.  I’m thrilled that my open positions at the time were exited for relatively small losses given the sharpness of the overall move.  The only option trade I did put on was in the futures market so I can monitor and adjust after hours.  This trade will likely more than offset the losses from my other positions that were closed.

Lastly, I’ve updated my results page to include January – Results.  Overall, I finished the month with a 4.1% gain.