Friday, June 29, 2012

The FLIP side of conviction (ex $VIX vs. $AAPL)

In these turbulent big swing trading days most of us likely have positions that have gone wrong. It is in times like these that we need to HONESTLY revisit our thesis and CHALLENGE our conviction antagonistically. I call this post the "Flip" side of conviction:

SITUATION: A while back I had VIX trade that went wrong on me. I got stuck in a very tight iron condor (long story for another time). So I had the choice of a)closing it and taking the loss; b) punting out into further months and let a bad trade drag on; or c) try to end it there in that period. So, I opted to try and end it right then and there.

ORIGINAL THESIS: The VIX was showing strong support levels around 20. Also the Eurozone was showing no signs of solutions. Most importantly, there was no leadership anywhere in the world. This meant that markets should remain nervous which in turn should have kept the VIX at elevated levels for a good while.

DETAILS: Position in question was: $VIX Iron condor 19/16-21/24
* 19/16 apr credit put spread.
* 21/24 apr credit call spread.

THE PROBLEM: Then the VIX tumbled to the 14s burying my lower leg way ITM. Support became resistance.

Instead of keeping on fighting the tape (which wanted to cap the VIX with complacency) I decided to revisit my original thesis. It became clear to me that markets were bloated with complacency. Though I didn't agree, I accepted the market sentiment and decided to use it to my advantage; hence, the flip.

So, on 4/12, I flipped the put spread into a credit call spread; I needed to end this sticky trade once and for all.
I closed my 19/16 credit PUT spread and opened a 19/22 apr credit CALL spread for $90 credit. So far I had collected a total premium of abt $1950. Had I stayed the course with my credit put spread I would have been 'HOPING' the vix would turn around. Instead, I ditched the hopium and accepted that my thesis was broken and acted to fix it.

WHAT HAPPENED: The vix stayed below my levels and I closed both positions for debit ($481.61). So the position finally was profitable but it was a struggle. Since then, I haven't put any VIX positions.

*** LESSON: Reserve the right to change your mind when faced with new set of circumstances. When I put the credit put spread on, the vix seemed to have solid support. But then it flipped and that support turned into solid resistance. Even until now and with all of this eurozone uncertainty it still is relatively muted.

IMPORTANT NOTE: I didn't just give in to pressure; I don't often 'flip.' Had this situation been in any of my $AAPL credit put spreads (instead of the $VIX) my decision would have been completely different. Since I believe that mid to long term AAPL is a definite buy, I would not have flipped on a credit put spread that goes in-the-money. I would have most likely opted to extend my trade out to give me more time to be right (or my thesis to work out). This is different that being stubborn with the trade; this is simple math: AAPL sells everything it makes and for a premium + people who don't have AAPL products wished they had them + AAPL has buckets of cash on hand + pays dividends + ... you get the idea. Happy trading.

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