Surviving a test of 3 SD event on TLT bear call spread trades

When I started to test my new premium selling strategy using TLT in middle to late September as described in my previous post on my positions on TLT & TBT, I had no idea that a 3 Standard Deviation test would soon appear. In fact, the 1st trades near middle of September were easy: 50% profit in 4 days as shown in the diagram below. At that time, FED announced end of QE. I thought TLT would start going down which was totally wrong as TLT continued to rise and shot up far beyond a 3 SD point at an intraday period.

Apparently, my short position of Nov$121/126c was in trouble as soon as it was opened. By Oct. 13, I began to realize that the uptrend of TLT was still intact as it firmly stayed above the $119 resistance level that I had in mind. So I began my adjustments and sold a larger number of bear calls of Nov$125/130c to make up possible deficits of existing losing position. The Delta of the short call strike Nov$121c reached my adjustment level of 0.65. So I rolled up and out the trade. On Oct 14 which was one day before the big 3 SD test, TLT broke up even further away from its upper Bollinger band. I had an opportunity to close the Original Nov$121/125c position and my sell order for Dec$127/132c was filled. I thought the price of TLT was pretty extended on that day. Then the big surprise came as market had a mini-crash and TLT sky-rocketed to test the 3 SD price. As usually, I watched market for less then one hour that day around Wall Street's lunch time. The Delta of my short strike Nov$125c were below 0.65, my adjustment level. Although shocked, I did not make any adjustments for TLT on that day. Well, the price started to move down which was what my positions favor since then. I think I was lucky to exit all the positions with 50% profits about 2 weeks later.

In retrospect, I think there are a few lessons learned from the adverse test for the high probability option selling strategies:

• Don't panic in the market extreme events and use trading rules to guide the reaction
• Trade a strategy only if you feel confident about it
• Keep sufficient capital to fight the adverse events (I'm still working on it)
• The high probability strategy can have large temporary losses (3 x potential profit this time)
• Profits can be earned even if price projections are wrong at times
• Refrain from over-adjustments

I had the thought of making adjustments if TLT reached and stayed above resistance level of $119. Had I done it, I would have sold TLT calls with lower strikes which would gave me larger temporary losses. It would be a bit more difficult to reach the 50% profit with the lower short call strikes. After reviewing my trades here, I think I should stick to the adjustment rule based on the Delta of short strikes, rather than support/resistance levels obtained from technical analysis.