A few weeks ago, I rolled my SPY put into SPY 200529 P 260, entering at $6.49 mark ($280 SPY). Since then, SPY has done me the favor of consistently moving sideways, even testing a $290 SPY regime. The mark on this position is currently $2.02 ($283 SPY). $-447 PNL can be explained by ~-$300 theta decay (15 days at -$20/day), -$120 vega (SPY vol sold off from 37% -> 31% at ~$20/IV), with the rest chalked up to delta wobble and higher order effects. Over the past month, the market heroically shrugged off a dismal earnings season and atrocious macroeconomic indicators, trending down into a lower vol environment. Only recently has market optimism waned, making my SPY puts look premature.

I’m now deciding whether or not it’s worth rolling the position forward. My conviction in the original short SPY thesis has only gotten stronger, especially now validated by recent market news. Vol is comparatively less expensive than a month ago, but by no means cheap. The real problem is that theta decay is nontrivial if my investment thesis horizon is “weeks not months” and will eat me alive if it ends up being “months.” Being a contrarian investor requires high conviction, especially if the other side is friends with the Fed.

Some rough, back of the envelope math: Let’s say I believe $240 SPY is a real possibility within the next two months and again express this view with far OTM -25d SPY puts. Over the course of two months, I’d eat -$800 in theta decay (-$20 theta * 40 days), with expected PNL <$2000 at $240 SPY (with a little bit extra <$300 as vol becomes more expensive). The Jun monthly -25d put currently costs $500 and also might require rolling forward. Dependent on your conviction, it’s a pretty reasonable coinflip if you had a portfolio of coinflips (this is not investment advice). Alas, all my coins are proverbial and I’m not paid to flip them.

If I really thought the $290 SPY regime was unreasnoable, I should have been opportunistically clipping in intraday and clipping out a few days later. I suspect this strategy would make some money if prices continue to wobble/go down and would rip my face off if prices marginally go up. The solution here would be to buy some protection or tune some proper stop levels. Difficult to measure hypothetical performance of a hypothetical systematic options strategy unless you have a proper backtesting framework.