My biggest individual loss this year was the result of a May KRE strangle. Interest rate shenanigans were throwing this underlying around like a rag doll. I did everything I could to defend, but this sucker the crap out of my position. It was one of those trades that makes you wonder if the market is targeting you personally – you know the feeling XX.
Annoying as it was, KRE was consistently one of the most active ETFs in my price range and maintained a decent for most of the year. Because of those reasons, I ended up trading this product more than anything else. That said, I found it difficult to pull off a profit in KRE. If you look through my trade journal, you'll notice several KRE trades that turned out to be losses and scratches. With as much trouble as this product gave me, my final P/L wasn't that bad. At year's end I only had a small loss in KRE – about $80. In fact, up until the December cycle it was the only product I'd traded with a negative cumulative P/L. Looking back, even though it's in the losers corner, I'd actually consider this to be one of my best efforts of the year. I took my nastiest loser and whittled it down to something insignificant. Had volatility not dried up completely, I think I could have turned this thing profitable. Regardless, I feel good about the way I handled this fight.
XHB: Home Builders Fund
My XHB position started out as a January which I established at the beginning of December 2018. was nice and high at 44.6, liquidity was great, and the underlying share price was well within my limits – it seemed perfect! That's where the happiness ended. Just one week later XHB had sold off by 6%, breaching my break-even. I decided to to leaving me with an
I learned that the disadvantage of these low priced underlyings is that you don't get much credit for rolling, making defense difficult. The share price continued to fall forcing me to widen my inversion so much that the best I could hope for was a loss of $34. was still extremely elevated, however, so I kept the position because I could make up to $160 of my loss back simply through the passage of time and volatility contraction (given XHB stayed between my now very wide inverted strikes).
XHB finally started to rally, and eventually found itself centered perfectly between my strikes. Things were looking better. By this time I was to February with over a month left before expiration. I took a risk and uninverted my strikes, and established a new strangle skewed heavily to the upside. This adjustment made it possible to once again turn this position into a small but profitable venture. It's not a move I'd normally make but thank God I did because XHB continued to rally back as hard as it had sold off. Suddenly, I found my upside break-even being tested. I rolled out to March and eventually had to reinvert my strikes to fight the rally. By the time I had closed the trade, XHB had rallied 25% off of its lows, and I had been left with an April strangle so Inverted that I once again had no profitable scenario.
As a result of the rally, XHB's implied volatility had plummeted. That combined with the depth of my ITM call caused the extrinsic value in my position to reach very low levels. It no longer made sense to hold the position because I was no longer being paid by the passage of time or volatility contraction. After 3 months of rolling and TEN adjustments, it was finally time to wave the white flag. I walked away with a surprisingly small loss given the size of the move and the mess it had created. XHB continued to rally for the rest of the year and option premium completely dried up. This left me no opportunity to try and recoup some of my losses. Looking back, this was probably the worst whipsaw I've ever experienced on a percentage basis. I'm so glad that I kept my trade size small because it allowed me to stay in the game and walk away with a few scratches instead of missing limbs.
The Art of Losing
I've said it elsewhere on Food for Theta and I'll say it here as well: Losing is a skill. When a trade works, there's nothing to do but take your money – easy and thoughtless. Defending losers, on the other hand, requires skill and composure when emotions run highest. Options allow us to achieve this through calculated, probability-based decisions and the ability to reduce losses without compounding risk. I love winning more than anything, but I'd be lying if I said there wasn't great satisfaction in a hard-earned loss. It feels like that dull pain you get after a solid workout... it just hurts so good!