Market Going Through Complex Topping Process as Volatility Continues

Please reference this as the topic has been asked and answered a number of times now:

https://sam-weiss.com/rally-day-127-a-decent-chance-today-is-the-peak-with-bearish-reversal-underway/#comment-5739

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Edited for clarity:

As we mentioned above, when we allocated at 3%, we did so on the following basis. First, the position sizes are already small enough to have inherent risk caps. We’re not going to sit there and worry about cutting losses for the exact reasons outlined in the comment linked above.

Instead of buying a 10% position with an “exit plan” to cut losses at 5%, we simply buy a 3% position with the understanding that we may take a 3% hit. That way, we’re not preoccupied with whether the current pullback is the real deal or just a short-term fluctuation giving us an exit window. We allocated this way to avoid having to entertain microscopic timeframes.

And now I’m just repeating what I’ve already outlined above.

When you say, “We have missed a lot of opportunities,” you’re viewing those as “exit opportunities.” But they’re only exit opportunities in hindsight—only in hindsight.

Here’s an example. The market sold off sharply on Friday, right? A huge reversal—from $613 down $23, or roughly 3.5%. It could just as easily have gapped down on Monday another 2%, closing around $576 and causing the Oct 17 spread to rise to $1.93.

If we had exited on Friday, you’d now be saying, “The fact that QQQ reversed 3.5% should have told you not to close out the position—we’d have seen follow-through next week.” But since QQQ didn’t do that, now we’ve supposedly “missed a lot of opportunities.”

We don’t engage in that kind of hindsight analysis or micro-trading mentality. To avoid even thinking that way, we simply cap our position size at 3%. That way, we don’t have to worry about whether “we missed opportunities to exit” or “made the mistake of exiting too soon.”

When we put on these trades, we did so based on two points. First, the market has never rallied beyond 114 days in any high-volatility rally—so the thesis was sound. Second, we capped our losses at 3%, setting up a clear-cut, limited trade. If it fails, it’s a 3% loss; if it succeeds, it’s a potential 15% gain. It’s that simple: a 3% allocation for a potential 15% return. We’re not going to worry about whether a pullback to $588.50 could have gone further or rebounded to $613. Nor are we going to worry about whether the pullback from $613 to $589 would lead into a correction or another bounce. We’re betting on the thesis as a whole.

At the time we put on the trade, it was based on the fact that the market could correct at any time and that historically, rallies have peaked around 114 days. That’s it—that’s the whole thesis. It’s an all-or-nothing proposition on a very small allocation.

The only narrow set of circumstances in which we’d exit early would be if the position both (1) rises to an irrational value and (2) is extremely unlikely to close in the money. That’s why we outlined our plan to close out the Oct 17 spread if the QQQ gapped down Monday morning and the spread spiked in value. A gap-down would almost certainly push the spread to an irrational value, creating a clear exit opportunity since there’d be no chance of it closing in the money.

At $0.05 or $0.10, the spread represents only 0.125%–0.25% of the total options portfolio—barely an afterthought compared to Arryn’s daily volatility. It’s simply not worth exiting over an $800–$1,000 cost in a $240k portfolio that moves far more than that daily.

With Oct 31 about 12 sessions away and the spread valued at $0.50, we’re risking $0.50 on the possibility of a market correction between now and then. For Arryn, that $0.50 equals a 1.5% portfolio risk. We believe that 1.5% risk is justified, so we’re not going to exit 12–13 days before expiration.

For instance, an hour ago the QQQ dropped to $597, and the spread spiked to $0.65. You may see that as a “missed opportunity,” but we see it as the market showing a real risk of rolling over into another major reversal. Another big reversal could trigger a significant sell-off at any time. The fact that QQQ later rebounded to $601 doesn’t change that risk profile at the moment QQQ hit $597.

Thus, our exit plan is simple: (1) exit if QQQ rolls over into a correction, or (2) exit at an irrational value.

At a 3% position size, this was built as an all-or-nothing thesis. The loss limitation was baked into the position when we entered the trade.

If we intended to “cut losses,” we would have taken a much larger position and then set stop-losses. Instead, we simply took a 3% position to limit the trade’s impact from the outset.

To illustrate, suppose we bought a 0.10% position. Does an all-or-nothing proposition make sense then? At a 3% entry and a 1.5% current value, that’s far below the portfolio’s daily volatility. It’s not a position worth “cutting losses” on when a correction could easily occur between now and Oct 31 that could make the spread rise 3x–6x from its current value.

That’s our approach.

Someone allocating more would face a completely different set of decisions. But at a 3% allocation, we’ve deliberately eliminated the need to worry about constant re-entry or exit decisions each time QQQ fluctuates.

We don’t need to ask, “Should we close out at $590 when the market could easily gap down Monday morning into a correction?” Nor, “Should we cut losses if QQQ rises to $606?”

For example, suppose we said, “A push to $606 opens the possibility of retesting the highs. We should cut losses and close out the Oct 31 spread at $0.30, preserving $1,700 in the Arryn portfolio.” Then suppose QQQ falls to $475 within 10 days, pushing the Oct 31 spread to $9.75—adding $60,000 to the portfolio (a 25% return). In that case, we preserved a mere 0.5% and lost out on a 25% gain. That’s the crux of the problem.

By the time it’s clear a position won’t close in the money, it’s usually too undervalued to matter. That’s why capping allocations—rather than worrying about cutting losses—makes the most sense.

Alternatively, think of it this way:
Is there really a difference between someone allocating $73,250 to a trade and setting a stop-loss to cap losses at $13k, versus someone simply allocating $13k upfront on an all-or-nothing basis? Both are risking $13k—the latter just skips the stress and micromanagement.

And that’s the key point. Which strategy is stronger—the large allocation with tight stop-losses, or the small allocation with a built-in cap where we don’t have to fret over every market swing? That’s why there’s no “exit plan” in the specific sense you’re asking about. We’ve structured it so that we don’t need one.