Practice Trades Cal 1.12 (Part 1)

Cal 1.12 (guidelines here) begins 2/27/20 (78 DTE) with SPX 2995 and trade -$168 (-4.3%). MR is $3,608 (two contracts), TD 53, IV 35.2%, horizontal skew +1.8%, NPD 0.8, and NPV 224.

“Conventional wisdom” (see second paragraph) would probably suggest skipping this day for entry given a crazy market down 3.1 SD! I can imagine a volatile, whipsaw market causing hefty slippage, but looked at another way if I place a limit order and just wait, then I can imagine having a good chance to be filled precisely because of the market’s wild movement.

The positive horizontal skew provides me with a little extra bonus compensation for the risk taken in a volatile market.

How much compensation, you ask?

I admittedly zoomed in to make this look super large. However, what is no joke is 460 points between expiration breakevens (BE)—a full 15% of the underlying’s current price. If volatility tanks then the graph will move down and BEs will narrow, but as the positive skew reverts, T+0 will rise. Lots of moving parts here.

Surprisingly [to me], the official max loss (-$728, -20.2%) is hit the very next day with market down 1.1 SD:

Should I exit this trade?

The market is down 59 points, but I still have 166 points to downside BE. Distance between expiration BEs has increased to 530 points with IV now at 45.4%. Horizontal skew has increased and I still expect a reversion to negative horizontal skew to follow (recall last paragraph here). TD 25 also suggests solid potential for profit potential going forward.

I will continue next time.