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Trading 2007 Feb 27

Discussion in 'General Discussion' started by Teddy, Apr 9, 2017.

  1. Teddy

    Teddy Well-Known Member

    I have been back testing for a while and keep running into a few dates. My start date on a trade was Feb 15. The market drop for 2007 Feb 27 came up.

    I could not figure out how I would able to tell this was going to happen and and the strategy that would work for this drop.
    I tried the Road Trip and M3. But nothing survived this drop.

    I couldn't see why I would have put on a bearish fly as this trend kept going up.
     
    Last edited: Apr 9, 2017
  2. ACS

    ACS Well-Known Member

    The market was in a strong bull trend and if you look at a monthly chart then the drop in early 2007 was right in line with previous corrections since the last major bottom. Financial markets do unpredictable things so don't drive yourself crazy, as they say: stuff happens.
     
  3. Teddy

    Teddy Well-Known Member

    It is driving me crazy.

    Going through the 12th time back-testing 2007 to the present.

    Unless the only way around this is money management of 2% risk which turns out to be 10-20%. Or not to be in the market at certain times when the market has ran up so much for so long.
     
    Last edited: Apr 9, 2017
  4. Harry

    Harry Well-Known Member

    Money management is definitely the key. You can never have a single trade wipe out all of your capital.
    Also, when you have a losing trade, it does open up possibilities of opening counter trades that will make you money and hopefully reduce your losses, and to open them you need spare capital anyways.
     
  5. Harry

    Harry Well-Known Member

    Also, help me understand what happened: https://finance.yahoo.com/quote/^GS...02000&interval=1d&filter=history&frequency=1d
    I was looking at prices at this yahoo link and all I see is a 3.5% drop. Surely (Shirley) we have had bigger drops. Similarly Russel was up 1200=>1400 (bigger move but similar price value as SPX from those days hence the comparison) post election in 2016 very rapidly (although not a single day change) and people traded that and survived.
     
  6. Marcas

    Marcas Well-Known Member

    Teddy, did you try STT?
     
  7. Teddy

    Teddy Well-Known Member

    Have not.
     
  8. Steve S

    Steve S Well-Known Member

    6% market drop in 2 weeks
    vol coming off extremely low levels
    "real vols" changed, not just vix (parallel vol increase)
    skew steepened on the vol increase
    All ingredients working together for a bad butterfly or condor trade ... if you want, give me a trade structure and entry date and I'll show you the p&l decomposition.
     
  9. Teddy

    Teddy Well-Known Member

    Might be a good exercise. I put on several trades.
    #1 The first was one place on 2007 Jan16 on the SPX using the Jun15 (150 DTE) puts: +1400p/-2x 1375p/ +1325p, figuring that there was a support of around 1378 during the 2006Nov28 low which did seem to hold.

    #2 Placed on Feb26 on the May18 expiration with (81DTE) on SPX puts: +1470p/ -2x 1425p /+1350p

    #3 Placed on Feb26 on the May18 expiration with (81DTE) on SPX puts: +1470p/ -2x 1425p /+1300p

    #4 Placed on Feb26 on the May18 expiration with (81DTE) on SPX puts: +1470p/ -2x 1425p /+1300p with debit spread at the support +1375p/-1350p which made a difference.

    I did try some 53DTE expiration trades but they were too much of a disaster due to the higher gamma and I deleted them.
     
    Last edited: Apr 10, 2017
  10. Steve S

    Steve S Well-Known Member

    Yikes ... I'm not sure you're going to learn much about what the market was actually doing on that move by looking at something that far out ... but if you're really interested in that particular trade, here are charts of the fly premium, p&l decomposition and skew for Jan 16 - Mar 16 ... the minor net loss seems to be attributable to mainly gamma and vega, but the volatility caused by the 2007-era funky chain data is swamping the picture somewhat. Maybe your back test is skewed because you're hitting timestamps with bad chains?

    M07_prem.JPG

    M07_pnl.JPG

    M07_skew.JPG
     
  11. Steve S

    Steve S Well-Known Member

    This one is more clear because the raw data is smoother ... but still pretty much the same story: An "uninteresting" trade because it's pretty much delta/gamma with nothing really interesting going on with vol/skew ... it appears your general picture is a market where the initial vol was too low for the moves, meaning you had unusually treacherous gamma. An old story; one which we are currently poised to repeat. Same charts posted below for May trade, for Feb 26 - Mar 26:


    K07_prem.JPG

    K07_pnl.JPG
    K07_skew.JPG
     
  12. Teddy

    Teddy Well-Known Member

    Thanks. Let me examine Aug 2015 to examine the skew then. I could not get IV data for 2007.
     
  13. status1

    status1 Well-Known Member

    I don't see anything special about this date
    From the chart it looks like a one day drop of 50 points and than recovered after a about a month
    I don't have a back tester but just recreating those trades with today's prices it looks like those trades are a bullish setups with the t+0 line tilting to the left with too much positive delta
    With 150 DTE you are not getting much Theta to help the trade but you have a lot of time on your side if you have the stomach for it to see if it stays there or goes further down
    The second setup is similar but with less time 81 DTE so you would need to go quite close to expiration to get some gains out of it
    45/125 setup is not exactly a road trip type setup You are getting more credit but also more risk on the downside so it should not be a surprise if you are getting a loss when the SPX goes down
    I think a 50/75 would have been a better trade IMO
    Keep in mind all trends come to an end eventually so you cannot assume that it will keep going in the same direction endlessly especially after a long bullish trend or a long sideways action as we have seen recently
    So that trade would have been fine at the beginning of the trend or at the end of a bear trend but I would not place that kind of trade after a long bullish trend
     

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