As I’m sure few members failed to notice, we took a wild ride this afternoon. SPY bottomed out at $105—more than $11 below where it opened. Old-school fundamental analysts went straight to the Correlation Game, blaming fears of European debt contagion, while those who understand how the market works under the hood pointed to a possible fat-finger trade that destabilized the Program-Trading Matrix. As a mathematician looking at a 512-tick chart of SPY during the Event, I tend to believe the latter explanation (while respecting the former and its obvious role, of course):
Regardless of the events or causes, what this forum focuses on is how we apply our strategy. An adjustment is triggered intraday only if we’re near our 25% loss-level risk-management threshold, and by the time that may or may not have happened this afternoon (quote data had become unreliable), bid–ask spreads were wide enough to drive a truck through and no one from either side was willing to step in front of it. Like it or not, when the market melts down like it did today, there’s little we can do except wait until the smoke clears and start picking up the pieces. (Perhaps a timely reminder of the importance of proper capital allocation.)
At the end of the day, SPY had recovered to almost $113—well below our adjustment threshold, but it was above our expiration breakeven and left us with a small net gain. Nevertheless, we’re on adjustment watch again tomorrow, with the objective of reducing our delta risk by one-half to one-third if SPY fails to reclaim $114.70 within the first hour or so of trading. Expect to see either a trade alert or a status update by 11:00am edt.