Crash on Black Monday

Market CrashFollowers of this blog may wonder where I disappeared to just as the markets collapsed in what will likely be another historic day in stock market history. Did my account blow up? Did I survive to see another day? Did I jump out of a 20-story building? Fortunately, none of those scenarios is how things played out. In reality, I am on a family vacation this week with limited internet access or time to trade.

I was not immune to yesterday’s meltdown and in full-disclosure will share with you my story below. Although not as dramatic or as painful as some, it still offers lessons that I think are valuable – at least to me.

As I prepared last week for our trip, I ardently worked on closing out positions. Knowing that I would have limited access to both internet and my computer, I did not want to have a lot of positions hanging out there. There is nothing worse than trying to relax and enjoy yourself with your family and being consumed by worry about your portfolio. By Wednesday afternoon last week, I had closed out all of my open positions except for two crude oil positions that, quite frankly, did not concern me. I took a few losses to close out positions early, but felt good about the fact that I was leaving on a trip with no black clouds hanging over my head. This would be the last smart decision that I would make over the course of the next few days.

Last Wednesday, towards the last hour of trading, the /ES started a small (relatively speaking) decline, and I decided to go ahead and sell an /ES Dec 1600 put for $4.75. After all, the VIX had expanded to over 15 and that was “rich” by comparison to the previous few days where it was sitting at 13. I am not sure what possessed me to enter this position, but it was wrong in so many ways. I had just closed out a bunch of positions so I could be worry-free during our vacation, so why put myself in this position? Often times traders trade simply out of fear that they will miss out of an opportunity. Trading for the sake of trading. I do not believe in this and am not sure why I fell victim to it.

2015-08-25_Chart_SPX

On Thursday, the VIX got up to 17 and the SPX was down another 40 points. This looked like another great opportunity to “buy the dip.” But I did not want to put on too much risk since I was going to be away from my trading platform. So, I sold a defined-risk spread in the /ES – the Oct 1725/1675 put spread for $1.45.

On Friday, things got even more interesting as VIX expanded above 20 and the SPX broke below the 2000 barrier. So, of course I sold another /ES put. This time, I sold the Oct 1450 put for $3.50. I assumed that things would get worse on Monday, but I had know idea how fast things would break down nor how high the VIX would expand driving the premiums on these options to extraordinary levels.

2015-08-25_Chart_VIX

On Sunday afternoon we left on our family trip. The next time that I saw anything market related was about midnight on Sunday night. My account looked ugly. The market was in the midst of a crash. I shut off the phone and went to bed.

On Monday morning at about 7am ET, I looked at my phone and my heart sank. My account was down over 20%. I did not know what would happen next, but I decided that the first course of action would be to sell one /ES futures contract as a hedge against my long deltas. This would prove to be a smart decision. An hour and a half later, it was time to check out of our hotel and continue our drive to our destination. I checked TOS one more time and saw that the hedge had worked out. I decided to close ALL of the /ES positions and just bite the bullet. I did not want the stress to ruin our vacation any further. So here is how it played out. I closed the 1725/1675 put spread for a small loss of $388.14. I then closed the Oct 1450 put for a loss of $842.82. I then closed the ugliest of the positions, the Dec 1600 put for a huge loss of $2,105.32. I then closed the ES future for a gain of $1,082.18.

Overall, my account is now down $2,304.56 for the month of August. The portfolio is now up only by 16.18% for the year versus down 4.27% for the S&P 500 (see Trading Results).  The portfolio is currently about 90% in cash.

Is this a major setback? Absolutely. However, looking on the bright side, my goal in trading is to make 2% per month. At this point, I am just about at that goal for this part of the year. I am thankful that my account has not blown up like so many others that I have received emails from. I am not immune from trading setbacks and am certainly not immune from making trading mistakes, some of which are downright stupid. The experiences of the past few days have reinforced a few key takeaways. First, stick to your trading plan. Do not be afraid to take losses. Second, when you decide that you are not going to be able to trade for a week, do not be lulled into placing trades regardless of how good the opportunity may seem.

As for going forward, the volatility is likely to remain elevated for several weeks. I do not believe this is over. The global economic conditions that are exacerbating this meltdown are not going away quickly. I believe that we are entering a period of great trading opportunities. As for me, I am off to the beach! Stay posted!

  • The Lazy Trader

    Excellent decision on shorting that /ES contract. You would be up only 6% for the year.
    This is still good, seeing how the markets are negative for the year as most investors and traders are. Clean slate Aram, now off to killing it for the rest of the year.
    LT

  • Jonathan

    Great blog post. Thanks for sharing your experience. As for me, I closed many spread positions when the delta hit 25. As a result, my account is now down abut 1%. It was up as much as 20% earlier last week. I don’t regret any decisions that I made. I followed my trading plan as I have outlined. There will be a few changes to the strategy going forward to help mitigate a market correction of this magnitude. The most important change is something I am calling ‘portfolio insurance’. This is to buy a very cheap long put far out in the future every 2 months using 0.5% of the account size. If we have another market drop like the last few days, these puts will skyrocket 5 to 10 times the original cost and should help mitigate any losses.

  • Chang Liu

    So… I’ve come out of retirement.

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