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Black Swan
- Thread starter osho67
- Start date
Quote from domestic:
of course i agree with spin. my only 2 cents is if you have simple credit spreads and the market blows through them; there is no defense. short futures after the fact and you can get killed even worse. best thing is to close for the loss.
you can move to fly's, debit spreads and other ratio type trades. even consider doing 2:1 RR trades. 5 point es spreads for instance. you can look all day long and never fully protect credit spreads.
I've been trading primarily selling strategies using ratio spreads for three years now with decent results. Using 1:2 to begin positions allow a defense move of converting the losing directional trade into a winner buy buying in the 1 naked option and creating a long bull or or bear spread to take advantage of the contrary move. I've started experimenting with calendar ratio spreads as well as an option selling strategy with some success.
Buying cheap OTM strikes or a broken wing butterfly helps keep margin under control as well to hedge these positions.
<<< If you are writing credit spreads or iron condors or what ever other method- how do you protect yourself from Black swan event? >>>
I write credit speads myself. There's not much you can do once the event occurs. However, there are things you can do BEFORE the event occurs.
I have 2 replies:
The 1st is,... if you think the market will continue to drop or drift down, you can close your short put and allow your long put to remain open. If you are correct, you can make up for some of your losses, as the stock continues to deteriorate.
The risk is, that the market then reverses, and now you lose twice.
Thus its generally better to close the position... depending on how much time remains and where your stock is trading.
My 2nd reply is, to set up your credit spreads as defensively as you can to start with.
That means being deep otm.
It means using narrow strike gaps, as low delta trades maintain their credit value better than wide gap spreads that are deterioating.
It means using quality stocks, as those are the ones more likely to recover more quickly, than over valued and/or over debted companies. Stocks can recover in weeks. It doesn't have to take several months or years.
It means diversification among many industries, as some industries are more "defensive" than others, and are thus more likely to recover sooner. And depending on what caused the event, some industries may actually rise.
I means laddering your trades over more than just one month. We've had some months that were just horrible, and then a month or two later the market did very well. Don't have too much cash at risk in one particular month.
As a defensive strategy BEFORE an event occurs, you can close some positions in which you have already earned most of your desired credit. A strategist plans for bad times BEFORE they occur. This lowers your market risk, once you've earned most of the credit. May not be worth risking your cash for a nickel or two.
Select stocks with stong pretested L-T downside tech support. While it may not hold depending on the severity of the event, it's still a good defensive play when initiating a spread.
Going back to setting up your spreads to initially be deep otm, and using narrow strike gaps..
Being otm "buys you time".
Time to hopefully close your position before it goes ITM. Or at the very least, before it goes too deep ITM.
And having narrow strike gaps will result in your credit value not being as severely impacted by a dropping stock and a spike in VIX and IV, as a wider gap strike would be.
Being otm and using narrow strike gaps, and the other criteria discussed above, are defensive plays, for a strategy that doesn't allow for defensive plays AFTER an event occurs.
Thus, if you are doing credit spreads, you must plan for difficult times BEFORE they occur.
The likelihood of a 1987 crash occuring are extremely rare... if at all. There were a number of procedures put in place after that, to slow down and/or prevent such emotional and technical selling
However, we can still experience substancial % drops.
Thus, I think it's best to think defensively when initially setting up a spread. That may be your only chance to react defensively, for a strategy with little defense.
Putz Master
I write credit speads myself. There's not much you can do once the event occurs. However, there are things you can do BEFORE the event occurs.
I have 2 replies:
The 1st is,... if you think the market will continue to drop or drift down, you can close your short put and allow your long put to remain open. If you are correct, you can make up for some of your losses, as the stock continues to deteriorate.
The risk is, that the market then reverses, and now you lose twice.
Thus its generally better to close the position... depending on how much time remains and where your stock is trading.
My 2nd reply is, to set up your credit spreads as defensively as you can to start with.
That means being deep otm.
It means using narrow strike gaps, as low delta trades maintain their credit value better than wide gap spreads that are deterioating.
It means using quality stocks, as those are the ones more likely to recover more quickly, than over valued and/or over debted companies. Stocks can recover in weeks. It doesn't have to take several months or years.
It means diversification among many industries, as some industries are more "defensive" than others, and are thus more likely to recover sooner. And depending on what caused the event, some industries may actually rise.
I means laddering your trades over more than just one month. We've had some months that were just horrible, and then a month or two later the market did very well. Don't have too much cash at risk in one particular month.
As a defensive strategy BEFORE an event occurs, you can close some positions in which you have already earned most of your desired credit. A strategist plans for bad times BEFORE they occur. This lowers your market risk, once you've earned most of the credit. May not be worth risking your cash for a nickel or two.
Select stocks with stong pretested L-T downside tech support. While it may not hold depending on the severity of the event, it's still a good defensive play when initiating a spread.
Going back to setting up your spreads to initially be deep otm, and using narrow strike gaps..
Being otm "buys you time".
Time to hopefully close your position before it goes ITM. Or at the very least, before it goes too deep ITM.
And having narrow strike gaps will result in your credit value not being as severely impacted by a dropping stock and a spike in VIX and IV, as a wider gap strike would be.
Being otm and using narrow strike gaps, and the other criteria discussed above, are defensive plays, for a strategy that doesn't allow for defensive plays AFTER an event occurs.
Thus, if you are doing credit spreads, you must plan for difficult times BEFORE they occur.
The likelihood of a 1987 crash occuring are extremely rare... if at all. There were a number of procedures put in place after that, to slow down and/or prevent such emotional and technical selling
However, we can still experience substancial % drops.
Thus, I think it's best to think defensively when initially setting up a spread. That may be your only chance to react defensively, for a strategy with little defense.
Putz Master
While paper trading isn't exactly the same as real time, it's certainly the best way to get trading experience. I real time day traded (equities not futures) for smal gains for a number of years before I had a break out year. Keep at it on paper until you get comfortable with the process and start to see some consistent results.Quote from osho67:
I feel daytrading futures is the best way But that is a difficult game. I have paper traded futures now for nearly two years but at the most I am at breakeven stage.
If/when you go real time, trade very small until you see see the same consistent results. And most of all, pay extreme attention to your money management. It doesn't matter how many trades you make as long as all of your losers are small.
If you're hedging in the same underlying, isn't there somewhat of an offset? I mean if you sell a high IV put on ABC then your receiving more premium which you pay out on the vertical leg.Quote from stevegee58:
Cheap OTM calls and puts are considered the easiest insurance against "the big one". Keep in mind that the IV on far OTM options is generally higher than ATM every since Black Monday 1987. Look up "iv smile".
Higher IV = relatively more expensive. You're paying a higher than average premium for this insurance.
I don't think diversification means a whole lot in a black Swan. The market was down 38% last year, a Black Swan. There was nowhere safe to hide but cash. Laddering doesn't protect against it either. It just delays the pain. You can only protect against black swans by going to cash or having more protection or selling premium on the other side. Some protext more, some less. Diversification only spreads the pain.Quote from Putz Master:
It means diversification among many industries, as some industries are more "defensive" than others, and are thus more likely to recover sooner. And depending on what caused the event, some industries may actually rise. I means laddering your trades over more than just one month. We've had some months that were just horrible, and then a month or two later the market did very well. Don't have too much cash at risk in one particular month.
What makes you think that if you got it wrong the first time that you're going to get it right the second time? The whole idea with hedging is to adjust the position to benefit from the unknown change of direction.Quote from Putz Master:
[ if you think the market will continue to drop or drift down, you can close your short put and allow your long put to remain open. If you are correct, you can make up for some of your losses, as the stock continues to deteriorate. The risk is, that the market then reverses, and now you lose twice.
for me,the best and the most inexpensive way to hedge against black swan is far OTM horizontal put spread.
lets say ES is 900 and you play it neutral to slightly bullish.
if you are scared that there might be something cooking,and there a chance ,that ES might drop to next support level of 820,than ypou can open several time spreads OTM puts.
let's say-short aug 820 put,long oct 820 put.
if you have an event-this spread will gain huge-first ,as later hapends,closer to exp. will be the august put,second,the delta of the spread will gain not a bad amount,and the third ,and best is,that with that move ,you will have huge spike in volatility,which also will boost nicely the october option much more,then the aug. shot one.
in case,that nothing happens-the august put will exp. and right away you can short ser. against the long oct.
so you are hedged for 3 months,a most of the time,your loses from the hedge will be almost nothing,if the ES stays stagnant,you might even make some cash out of it.
the most benefit,out of this type of hedge is the edge,that the volatility gives you-with a black swan,it will spike to unbelievable levels,which is the best for long OTM time put spread.
lets say ES is 900 and you play it neutral to slightly bullish.
if you are scared that there might be something cooking,and there a chance ,that ES might drop to next support level of 820,than ypou can open several time spreads OTM puts.
let's say-short aug 820 put,long oct 820 put.
if you have an event-this spread will gain huge-first ,as later hapends,closer to exp. will be the august put,second,the delta of the spread will gain not a bad amount,and the third ,and best is,that with that move ,you will have huge spike in volatility,which also will boost nicely the october option much more,then the aug. shot one.
in case,that nothing happens-the august put will exp. and right away you can short ser. against the long oct.
so you are hedged for 3 months,a most of the time,your loses from the hedge will be almost nothing,if the ES stays stagnant,you might even make some cash out of it.
the most benefit,out of this type of hedge is the edge,that the volatility gives you-with a black swan,it will spike to unbelievable levels,which is the best for long OTM time put spread.
dont forget the plunge protection team-it was made because of the 87 crash.
the goverment will step in.
dont listen to them,that they dont have such a thing-they do,and if you check up the huge upside moves in november and october last year,when the market was crashing......you will recognize who stays behind up moves of 1000 tiks in dow jones,within minutes,just before market closes......especially fridays.........before the weekend.....
the goverment will step in.
dont listen to them,that they dont have such a thing-they do,and if you check up the huge upside moves in november and october last year,when the market was crashing......you will recognize who stays behind up moves of 1000 tiks in dow jones,within minutes,just before market closes......especially fridays.........before the weekend.....
Quote from TheoHornsby:
I don't think diversification means a whole lot in a black Swan. The market was down 38% last year, a Black Swan. There was nowhere safe to hide but cash. Laddering doesn't protect against it either. It just delays the pain. You can only protect against black swans by going to cash or having more protection or selling premium on the other side. Some protext more, some less. Diversification only spreads the pain.
We had a 50% market crash from 2007 - 2008. Lasted about 18 months. Some would call that a black swan event because of the % drop. Others would call it a severe bear market, because it took place over 18 months vs 18 days.
My definition is when a sig % of the drop occurs before you can react to it.
Given that the market is closed about 80% of the time each week, and only open for trading about 20% of the time,... chances are if some "event" occured, it would occur when the market was closed.
That means the market will probably delay opening. And when it does open, it will open down BIG!.
The issue is not diversification of industries, nor laddering of expiration dates, nor % otm, nor narrow spread gaps, ect....
The issue is the overall "package".
If you have initiated a defenseless credit spread, what overall defensive package did you put in place, if some event occured while the market was closed during 80% of that week?
If the market gaps down 5 - 10% at the open, are you already at max loss on all your trades,... or did you have a sig otm safety cushion with a more stable low delta spread, with some defensive stocks and industries in your portfolio?
Was all your cash concentrated in just 1 - 2 months?
Did your stock show strong pretested L-T tech support near or above your strikes?
Do you now have "TIME" to react to the event, before your stocks go ITM?
Will your losses be manageable, or will the stock drop and spike in VIX/IV open your trade at max loss?
And if you open at max loss, is your stock potentially "recoverable", because it was of good quality and price value? Or was it over valued and/or over debted?
My discussion was about "the package".
Putz Master