Day Two -- Paper trade-- attempted Delta neutral SPY IV drop capture

Hold on for the ride! See this post, for the beginning of this exercise

Instead of a quiet prelude to the July 4th holiday weekend, the market decide to open sharply lower. Instead of a expected drop in IV, it went up instead. Assuming I was lazy and didn't rebalance the delta hedge at the end of day one the result was a $377 loss, 0.3%.

Specifics:

SPY 89.81 off 2.58 (- 2.8%)

SDS 57.84

91 July Call 1.20 (start 2.97) Delta .38 IV 24.5

93 July Call .54 Delta .22 IV 23.05 (up 0.55)

VIX 27.95 (up 1.73)

DISBA 29.25 (up 1.65)

VXX 71.58 (up 3.82)

DISBA / VXX = .408

Net Debit = 1000*89.81+430* 57.84-540 (93 July calls) = 114141 (Loss of $377 from the start -- .3% loss)

If I had delta rebalanced at the end of day 1, buying 37 more shares of SDS the loss would have been $250 instead.

Lessons learned: While the damage was limited, this example shows that pre-holiday action can be tricky. A deeper in the money option would have probably suffered about the same amount (more money gained on the option value decrease, but less SDS hedging). Since the options still had 18 days to go at the beginning, it was probably too early to try this sort of game. Re-adjusting the delta through the two days would have reduced the losses, but commission costs would probably been prohibitive.