Sizing Your Confidence

How active traders and investors think about scaling their bets

Setting the Table:

• After a gradual rise early in the week and a slightly faster fall yesterday, the market is about where we started. Not what you expect from one of macro’s biggest events of the year. Hold your orders though, Jerome Powell started speaking at 10AM ET. 

  • Events are a difficult trading opportunity - everyone wants to catch the move but no one wants to stick their neck out first. Market makers regularly widen quotes around Fed announcements or some other intra-day news release. 

  • For buy side traders the logic is more complicated - how do you capture your momentum, reversion, or otherwise without getting stopped out or head faked by early moves? I’ve seen traders take a window from 30 seconds to 30 minutes after a release - it depends on your strategy. Hedged equity doesn’t think about this at all. 

  • Dealers will jump on early liquidity pockets because that’s the job. Their business is long entropy. The more precise your opportunity set, the more you want to avoid setups around events. At the far end of the spectrum - long term overlays should just keep scrolling.

• Short term VRP has perked right back up. We know the 10 day reading here is relatively choppy, but for managing shorter term positions it’s important to keep an eye on. 

  • Yesterday’s reading of +6.8% was the same as the August 15th reading (Yellow circle). Why is that significant? They are looking back at two very different ATMVol environments (red circles). 

  • Short vol won to the tune of almost 7 clicks coming off a 32% reading, and then again from a 19% reading a few days later. The vol crush has been spectacular.

    

• For short term opportunity traders, this has presented a bonanza. We have directional swoons, but also wildly vacillating inputs. Over at TheTape we’ve deployed our newest report to monitor this - Premium Condors.

  

  • The report compares condors within various different strike ranges. It calculates a “naive” expected value based on delta, and also presents risk metrics and the probability of profit. 

  • Adjust your target delta and width levels, and even introduce a delta bias to your condor (e.g. selling a closer to the money put spread if bullish, or leaning calls tighter if bearish.) 

  • Currently available to our Investor tier subscribers, we’ll soon be releasing a stand-alone version. Sign up for a seven day free trial and get access to this as well as all our live reports. 

• Longer term investors are also looking at this market wondering if there is some kind of adjustment necessary. Last week we talked about a Second Shot at Hedges. It’s not just 10 day vol that’s reverted - most other hedging opportunities got a lot cheaper. 

• No matter the bet, sizing is a critical component of trading. Today we’ll discuss various frameworks for sizing trades within a portfolio.