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Summary

TOMIC teaches a static risk posture: fixed max loss per trade, fixed portfolio heat limits, delta managed back to targets as the market drifts13. The blind spot is that a static delta target is itself a regime bet: a market-neutral short-vega book is short delta to crashes through its short puts and its convexity, and it earns its keep only in calm, contango, positive-VRP conditions4. This concept's thesis: the portfolio delta target and preferred structure set should be a function of the regime label defined in Regime Definition, with the detection methods of Regime Detection Methods supplying the label with known lag.

Why Static Delta Targets Fail

  • Same target, different risk. A book at −20 deltas of index exposure has a completely different loss distribution in a calm contango regime (mean-reverting grind) than in a stressed backwardation regime (fat left tail, gap risk). The books acknowledge "market risk" hedged with OTM puts and VIX calls1 but stop short of making the delta target itself conditional.
  • Short premium is regime-conditional by construction. Selling IV above realized vol is the edge only when VRP is positive and the term structure rewards carry64. A static book keeps selling premium into backwardation.
  • Transitions are the worst time to have a target at all. During detection lag (1–5 days per the methods table), the regime label is unreliable; the rational posture is to run the book flat and add no new risk until the label re-confirms.

Regime → Delta Target → Structures Mapping

Baseline labels from the default set (VIX band × term slope × VRP sign). Delta targets are portfolio-level deltas on a hypothetical 100Δ underlying reference, per unit of portfolio heat, not per-trade sizes. "Forbidden" means not new-position eligible; existing positions are managed per their own risk rules.

Regime (VIX / slope / VRP) Portfolio delta target Preferred structures Forbidden structures
Calm (<20) / steep contango / VRP+ Neutral-to-short: −10 to −30 per unit Put credit spreads, iron condors, covered calls sized to carry (naked premium excluded by the risk never-rules) Long vega naked; heavy long-gamma bleed trades (theta cost dominates)
Normal (20–30) / contango or flat / VRP+ Near-neutral: −5 to +5 Iron condors, calendars, diagonals, ratio spreads skewed long Large short strangles; naked puts beyond standard sizing
Normal / flat / VRP≈0 Neutral: ±5 Defined-risk spreads both directions; wait-and-see sizing Any carry-motivated short vega (no premium to harvest)
Stressed (>30) / backwardation / VRP− Small long delta or flat: 0 to +10 Defined-risk long-vega/long-gamma tilts: put backspreads, call/put calendars sized small, VIX-call units, long puts as insurance1 All naked short premium; short strangles/strangles in any form; short VIX ETP-style carry exposure
Stressed / any slope / VRP+ (IV rich but spike risk) Flat to short, half-size Deeper-OTM credit spreads, defined-risk only, reduced heat Naked positions; aggressive vega shorts on size
Transition (label changed ≤5 days ago, any endpoint) Flat: ±5, no new risk Exits, rolls, hedges only1 Everything new — detection lag means the label is provisional

The mapping encodes the books' qualitative guidance (sell premium in calm conditions, buy units/insurance when fear is priced)24 but makes the delta target — not just the structure list — the regime-conditional variable.

Case Studies and Evidence

  • 2018 Volmageddon (Feb 5, 2018): XIV — a short-VIX-futures carry vehicle in exactly the "calm contango" regime — lost ~96% in one session when the term structure snapped to backwardation. A regime-aware system would have been flat or defined-risk after the first backwardation confirmation; a static-delta system had no signal to change anything. See Case 2018 Volmageddon.
  • March 2020 COVID crash: multi-week backwardation with VRP deeply negative; short-premium books that re-achieved their "static neutral" delta by adding short puts were adding the wrong exposure. See Case 2020 COVID Crash and Case 2020 Vol Spike.
  • Baselines for the VRP input: the regime gate is only as honest as the VRP computation; use the forecast stack in Vol Forecasting Baselines, never raw IV minus trailing RV of the regime you're in.

Implementation Notes

  • Recompute the label daily at the fixed snapshot time from Regime Definition; move the delta target with the confirmed label only, and treat transitions as a separate state.
  • Rebalance toward the target gradually (e.g., 1/3 of the gap per day) so the regime rule doesn't become a new source of churn and slippage; costs are part of the EV contract.
  • Log every target change with the label, the label's posterior/probability, and the snapshot data — auditable in the TOMIC infrastructure spirit1.
  • Acceptance test: regime-gated backtest must beat (a) static-delta baseline and (b) the VRP/GARCH baseline, net of costs, across threshold perturbations — otherwise the rule is noise.

Links

References

  • Chen, D. & Sebastian, J. (2012). The Option Trader's Hedge Fund. Wiley — TOMIC's risk framework that this concept makes regime-conditional.
  • Sinclair, Euan. Positional Option Trading. Wiley, 2020 — regime-aware positioning and delta management in practice.
  • CBOE (2018). "CBOE Statement Regarding the Termination of VelocityShares Daily Inverse VIX Short-Term ETN (XIV)." Feb 2018, https://www.cboe.com/about/press/released-products/volmageddon-etp-note/
  • Bollerslev, Tauchen & Zhou (2009). "Expected Stock Returns and Variance Risk Premia." Review of Financial Studies 22(11) — VRP sign as a conditioning variable.

Amendment Log

Version Amendment Status
v0 initial mapping in force
v1 (proposed) VRP size threshold — premium-selling eligibility requires VRP_size ≥ θ (calibrated); activation gated on fitted GARCH/HAR forecast + calibration + human approval pending

  1. Market-risk hedges (OTM puts, VIX calls) and heat limits in TOMIC risk management. ↩↩↩↩↩

  2. TOMIC's condition-based structure selection in Strategies. ↩

  3. Portfolio-level greeks management in TOMIC Greeks. ↩

  4. Conditions for selling volatility and the carry risk of short VIX positions in Volatility Selling. ↩↩↩

  5. Delta as a chosen exposure with gamma/theta costs in Delta-Neutral Trading. ↩

  6. Structure behavior under vol moves (backspreads, ratio spreads) in Spreads. ↩