April 12, 2016

To Rebalance, or Not To Rebalance

I find it very difficult to come up with hard rules on when to rebalance the volatility shorts.  Outside of the possibility that one of the two shorts could get way out of hand no matter what rules one comes up with, it's more likely that the hedging in general will lose efficacy when no rules are triggered for an extended period of time.

So far they have been my biggest money makers.  In fact, I'd be just below even without them.  It's just been a very hard trip for this portfolio over the last year.  That's why it's important to not squander what has worked well.

I made a decision Sunday to rebalance.  It has cost me money.  I don't regret it yet, but I may later.  I had some rules about rebalancing.  One I ignored when $VXX had gotten quite high.  This made me money.  Now I've rebalanced without the trigger of either a new all time high in SPY or cutting losses on the position.

My rationale was that if $SPY hit all time highs from this point, I wouldn't lose much rebalancing now.  However, if $SPY crapped out and it turned out to be a rounding top, I could stand to lose quite a bit as my $VXX position was 50% larger than my $SVXY.

I may be on the verge of a rule based on reversals and risk, or resistance vs trend and risk.  Not sure exactly.  For now I think it was the right call whichever way the market goes.

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