So the idea is that you leg into different positions as the trade goes against you in certain facets. In no particular order...Buy, double down, apply credit spread, write covered call, buy protective put, etc. what you end up with, is if after each mitigating leg is input, if it continually goes against you, would be a complex spread with a only certain range in which you would lose on the overall trade, and ideally it’d be a small amount. But of course towards the end of the legs, no profit is attainable, just capital preservation at that point. Hope that makes some sense...
Better alternative to an outright put
- Thread starter dickey7
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Lots of vendors out there sell complex systems where they have a possible adjustment for all kinds of different market movements. They'll typically present risk graphs before and after for each adjustment in isolation, and they all look exquisite. I've lots of backtesting over the years and personally, I'm not a believer in these sorts of trades. They're far too discretionary to be believable when you consider a large sample size. It's like carrying around a box of Band Aids and placing one every day or two the market makes a particular move against you. The saying "first loss is your smallest loss" comes to mind here because often when I've looked at such strategies, capital creeps up to the point where the trade just doesn't make sense (worst case would be your having to close parts at huge losses because BP drops to zero).
This is just my personal opinion and I certainly don't know what your personal strategy is, but if any of the above applies then I'd just caution you to watch out.
This is just my personal opinion and I certainly don't know what your personal strategy is, but if any of the above applies then I'd just caution you to watch out.
If you are in a covered call position this means that you already have a bit of downside protection compared to pure long stock. (and I assume that your position is in a ratio of 100 shares per 1 call). By adding a put to the short call you end up with some sort of synthetic short. For sure this is a safe position, but you end up committing a lot of capital to a strategy with very small returns.
As somebody else pointed out, options will never give you a 100% safe AND profitable position. 100% safety means 0% profitability, there is always a trade-off somewhere.
Said this, if you really fear about an imminent crash, you could buy 1 put for every 2 calls, the risk profile would be the one below.
As somebody else pointed out, options will never give you a 100% safe AND profitable position. 100% safety means 0% profitability, there is always a trade-off somewhere.
Said this, if you really fear about an imminent crash, you could buy 1 put for every 2 calls, the risk profile would be the one below.
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So in this position, assume the covered call had a negligible amount of premium/profit. This is a very near term position, daily or a few days out, but no longer than a week. As the stock heads towards my CC strike price, I want to insure against the blowout of a hard/fast drop through strike, resulting in a much larger loss. Buying a put outright is somewhat expensive, so I'm looking at different spread types to lessen the cost of insurance. Right now I am stuck on the short put ladder, or as previous poster mentioned a (2:1) put ratio... What I'm looking for may not exist, but at this point in the trade I would be willing to sacrifice CC premium, or even pay a slight amount to neutralize the G/L risk on the position until expiration.
Hi guys,
From the perspective of the above, how much downside protection would you be looking for do you think is necessary. Would you look for a put that would the complete range or maybe 1 to 2 standard devs ?
And what stocks would you choose for such trades.
Thank you
From the perspective of the above, how much downside protection would you be looking for do you think is necessary. Would you look for a put that would the complete range or maybe 1 to 2 standard devs ?
And what stocks would you choose for such trades.
Thank you
The vehicle I have been analyzing for this strategy is SPY. Looking for close to same coverage as an outright put (buy to open). But thinking if I enter as price approaches the CC strike (before it gets to or past strike price), I can enter the neutralizing insurance position at a lesser cost than outright put purchased. Looking for as close to 1:1 protection as cheaply as possible. Main idea is to exit the trade unscathed at this point.
I apologize for the poor drawing abilities, but see image attached. I overlayed a typical CC chart on the short put ladder chart. Not to scale... but this may be best representation of what I’m thinking.... would result in a small area of loss, while protecting blow out downward.
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At what strike price do you plan to buy the put in the above scenario ? Is it at the purchase price of the underlying ? Or higher ? Or maybe lower than the purchase price of the ETF ?
Likely the strike price of the covered call... that is kind of the part I’m asking for advice on... how to do it the most cost effective manner
This.
Any adjustment you make AFTER you already initiated your position will not affect the P&L you had up to that point.
1-If your position is losing before you buy the put, it will likely stay a losing position.
2-If your position is winning before you buy the put, you will just cut into your profits, but you will prevent big losses associated to a sudden drop. At this point, if you really fear an imminent crash, why not simply taking off the entire position? @lindq advice was very sound.