Why we underperformed when volatility spiked

BellaAsk Bella

I thought we underperformed as desk, relative to the opportunity set, with the recent spike in volatility.

There is a general market principle that increased volatility brings larger PnL for traders.

Why did we underperform?

Most on the desk have learned to outperform in a low volatility market.  I have written that 2017 was a year we outperformed our peers.  Traders have developed a PlayBook that does well when volatility is compressed.

Also with enhanced volatility, the opportunity was in the hardest products to trade intraday- SPY, QQQ, UVXY, VXX.  SPY is probably the hardest.  So we were challenged to transition trading style AND do so in the most difficult intraday products.

Further, we mostly traded market products for Trades2Hold (intraday swing trades).  We expressed these positions with stock and options.  There were moments where we were very long the market and holding.  The intraday and medium-term market was trending upwards and many were sitting with significant open PnL.  And then headlines hit the tape that disrupted intraday trends- Syria, trade wars, Trump investigation.

Traders were stopped out of long positions, with steep drops, after these headlines hit the tape.  These headlines were absorbed and then a new uptrend resumed.  But traders had been shaken out of some, all, or most of their long positions or short volatility holdings.

Said better, the tape paid Move2Move market trading and we were Trade2Hold trading.

Having said all of that, we should have done better as a desk.  We should have adapted quicker to the opportunity set.  Our job as active traders is to trade what works in present market conditions.  No excuses.

Now we enter a period where volatility has compressed.  And we enter earnings season.  We will wade back into Stocks In Play as a result.

My sense is while this experience was frustrating for traders and we underperformed, our desk improved dramatically.  I saw traders on the desk structure trades with much more sophistication that will pay dividends.  I saw traders better able to trade the overall market, using effective indicators for market plays and even building new tools to make trade decisions.  I saw traders size up in market plays, handling more risk responsibly outside their core trading strategies, that will allow them to trade bigger overall.  I predict this trading experience will spark higher profitability in high beta and large caps during this earnings season.

This is what we are seeing from our desk.  I hope that helps.

Trade well.

*no relevant positions