Debunking the Williams Hedge (Part 2)

Today I continue discussion of the Williams Hedge (WH) and my backtesting.

Let me address one technicality with regard to SPX IV. When people think about implied volatility for SPX, they usually think of VIX. Look at the screenshot below from OptionNet Explorer (ONE):

As seen in the Part 1 table, this number is 97.33 and 102.89 on 3/12/20 and 3/16/20, respectively. This website says the highest closing VIX ever recorded was 82.69 on 3/16/20, which therefore means the highlighted number can’t be VIX. Granted, I use data from 3:55 PM rather than the close for this backtest, but I find it hard to believe VIX could come down 20 points in five minutes. Until told otherwise, I am therefore calling the highlighted number “SPX IV” (probably calculated via proprietary ONE algorithm) rather than “VIX.” I will contact ONE Support to get a more complete explanation (also on what the percent change is based because 4:00 PM the previous day is not correct).

The Part 1 table says the WH performed miserably through the March 2020 market crash. Backtrading 10 contracts weekly of this strategy lands us down $650K on 3/23/20!

Per usual, I tried to backtest realistically by using values only 20% of the range from natural to midprice. While most backtesting chooses to ignore it, slippage is a reality of trading. We do not want to be the camp described in this second paragraph, else we’re probably better off finding a different strategy altogether. As you can imagine, when the market speeds up the spreads widen and I sometimes had to go nearer to the money to make sure I got requisite PCS net credit. As a single, inexpensive ($0.45) leg, buying the extra long is not affected by this so much.

We know when the market crashes, the PCS are going to “get killed.” This is explained in the WH video series and can certainly be seen in the table. The PCS studied started 20.9% and 22.5% OTM, which was not enough distance to keep them safe.

The video says when the PCS gets killed, the long puts will explode to cover them; this is where I run into problems. I sell a PCS every week (risk) and I buy two additional long puts (insurance) as well. This makes the position seem safe. One put is a 7 DTE teeny that serves only to keep T+0 elevated (saving portfolio margin). Even without the teeny, the second put leaves us net long contracts. What could possibly go wrong?

You sleep on that, and I will continue the discussion next time.