10 Minute Read

Tackle Today: Highway to Hell 🔥

April 16, 2019

By | 2 Comments

Tackle Today: Highway to Hell (Photo by Artem Maltsev on Unsplash)

≈ No stop signs. No speed limit. ≈

The market, this somehow concrete and, at the same time, abstract entity, wants to reach the all-time highs. Season ticket on a one-way ride.

As the candles steadily approach the ultimate level, I can’t help but notice how deep the VIX futures go, concomitantly with the decreasing volume heading into a long weekend, when we are going to stuff our bellies with chocolate, just to feel guilty on Monday, first thing in the morning. Sugar and cocoa hangover.

Market approaching the gates of Hell with a shallow volume and the VIX lying into the abyss reminds me of one thing and one thing only: risk.

Volatility is not a synonym for risk and vice-versa.

The problem with low volatility is that it hides the risk under the false impression that everything is OK. The risk is still there, it’s just not perceived and that makes fear and uncertainty hit low levels. Just think of those horror movies. It’s exactly when everything is calm and silent that the psycho jumps into the scene making us choke with the popcorn. The psycho was already there, hidden somewhere, we just couldn’t see him.

Absence of evidence is not evidence of absence. Compare and contrast 2017 with 2018 and you will see how bad things can go.

Our suggestion is pretty simple: think about buying insurance. They are cheap now. If you are a cash flow trader, use some of the funds raised to buy OTM puts. If you are a directional swing trader, give up some of your profits to invest in airbags in case the candles crash.

Going down, party time
Our friends are gonna be there too
We’re on the highway to hell

Chart of the Day

The Promise Land

Tackle Today Chart of the Day: The Promise Land

Hey mama, look at me
I’m on my way to the promised land.

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AC/DC – Highway to Hell (from Live at River Plate)

Going down, party time
My friends are gonna be there too

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I received an insightful question regarding portfolio protection. I’m posting it here in its entirety along with my response to see if we can all learn about the perks of buying puts to safeguard your account.

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2 Replies to “Tackle Today: Highway to Hell 🔥”

  1. Avatar EllenHodgson says:

    How far OTM do I go to buy put options on SPY? If I buy out about 1 year, is there a certain delta and theta I should use, or do I just make sure there is enough Open Interest and Volume? If so, how much Open Interest and Volume? Should I split the puts among other EFTs as well or is the SPY good enough?

    1. Hi, Ellen.

      These are all valid questions. The short answers are: (1) there is no one-size fits all approach that you can plug and play and (2) you’ve got to have a system for that, a hedging system. The ultimate answer to your questions is actually non-existent. How much capital you should deploy, how far OTM, how far in time and the target delta, these will only come from you either learning a ready-to-go hedging system and adapting to your reality or creating a system of your own. What I’ve been doing, although still testing, is buying 60-DTE OTM puts with a percentage of my account value and rolling them with 30 days left to expiration. But because my account delta (beta-weighted) is pretty neutral most of the times, I don’t have to spend tons of money on buying insurance. I am a cash flow trader, with no more than 1 directional position per month. I am funding the purchases of those puts with my cashflow system and I am also trying not to kill the theta. So, it’s a balance between money spent, the resulting delta and the resulting theta. They all have to work in agreement, otherwise, it will defeat the purpose or making money. Mark Spitznagel papers helped me a lot in understanding the craft (https://www.universa.net/riskmitigation.html)

      The best way to go, in my estimation, is you analyze your portfolio, its beta-weighted delta, see what types of trades and what types of securities you are holding, set goals and come up with a custom-tailored plan that works for you. That’s portfolio design in a nutshell. In the end, it’s your portfolio and your style of trading that will determine the ultimate hedging strategy for you.

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