The unthinkable

Well, the election was finally over and Trump did not disappoint his supporters with a landslide victory not only for himself but also helping to secure the majority status for GOP for both houses. I bet this is indeed an unthinkable probably the vast majority, if not all, had not expected. But to me, the even more unthinkable is the market reaction to the Trump’s victory. As you all know, I was expecting a major selloff of the market following his win. The market did sell off hard overnight but then it did something truly unthinkable at least for me. The market certainly has its own mind and will follow its own rhythm regardless what other people think and it is never wrong, sort of speaking.

 

While I was wrong about the hedge I promoted this time, I certainly don’t regret a bit about what I did and will do the same next time when facing a major risky incident. No one can be always right but if one wants to survive the market in the stock market for long, it is critical to always think about the potential risks and what protection that may be used to minimize a potentially devastating outcome. As I said, buying protection is just like buying an insurance that you can lose small to protect something big. I have sufficient long positions to enjoy the market jump but I would like to minimize a big paper loss in a major market meltdown.  I was talking about buying some VXX and for myself short term UVXY call options. While I fully understand that my cost for the calls would be a total loss, I always try to do something to salvage a losing position if possible. So let me share what I did with you in this occasion that may be useful for those who are playing with options.

 

I bought 80 contracts of UVXY Nov 18 $40 calls ($0.26 per unit) in an account with some open long positions as I did expect a major selloff that could trigger a huge run for UVXY. It costed me about $2000 which I knew that I might not see it again but it could make me 5-10 times of my money back if something really big happened. I was wrong as very quickly after opening today, the market started to turn around and my UVXY calls were plunging to less than $0.1. In other words, there is no way that I could expect any meaningful return of this position given the very short timeframe involved. Understanding that the market had discounted the risk associated with Trump’s win and very unlikely VIX would mount a huge run upwards in the short term, I placed a counteractive arm to hedge this position. I sold 10 contracts of UVXY Nov 18 $15 calls (about $2 per unit) that allowed me to collect about $2000 as well if indeed UVXY continued to slide down or just move side-way in the next 10 days or so. Good luck for me as UVXY continued to slide down quickly throughout the day and this short arm already gained 70% for me by the end of the day. In other words, I barely lost much from this losing position and if VIX goes up again, I may increase this short position to get more gains. I may end up with some profits if lucky enough.

The lesson from it: for protection purpose, only buy an amount that you can comfortably lose. If situation is right, one may turn a loss to even or potentially a gain. Of course always understand the potential risk of doing such hedge on hedge and don’t overdo!