Lesson: being right on volatility isn’t enough

Last week I used the structure below instead of pure long straddle to control risk and decay bleed ahead of US jobs.

The daily SPX straddle was around $40 going into the jobs number.

Five-day ATR was running near $80. On paper, paying $40 for movement did not look expensive so I bought some gamma this way.

We ripped higher as the number beat expectations.

Up 40–50 handles. Then down 80. Then it closed almost flat.

The move happened. Close-to-close, it didn’t.

This is the biggest challenge when you are long gamma and the market moves is deciding when to hedge or take profit.

The longer you let it run, the more money you can make, but if the move mean reverts then your gains are gone in a flash and can quickly turn to losses due to time decay.

To make an informed decision you need to know what kind of market you are in and also understand if the news that triggered the move is really that game changing.

Yesterday, once the rally faded and we reverted back toward the open, I took my profit quickly. I was not interested in being “right.” I was interested in being paid for edge I had identified.  Once we had the knee-jerk reaction, I was no longer trading "edge" and would just have been "hoping".  So, as soon as the market started to fade, I bailed.

The environment lately has been one of mean reversion which is why close to close realised vol is much lower than intraday volatility.  By watching this daily, you get a feel for the best way to risk manage trades when they are winners or losers.

I don't try to make wild predictions about the future, I trade what's in front of me and I respect the price action.