Conservative Options Strategy

Quote from yucca_mtn:

Guys - I AM hedged. My whole strategy is a hedge. I got no place to go for more hedging.


If I didn't want to hedge, if I were absolutely confident of a stocks direction, I would have a portfolio full of ATM spreads and make some REAL money. But I don't do that. I hedge my trades by going as DITM as humanly possible and still make a profit. Thats what hedging is, right? Giving up some profits to protect your portfolio? ATM spreads would make you 75% to100% profits in the same time frame that I'm making 25%.

I am hedged by virtue of the depth of the spread. Buying protective puts would eat up most of the thin profits I earn. Putting on bear spreads to hedge my bull spreads would do the same thing, unless I was lucky enough to have the stock stay where its at.

How many bear spreads would I have to have on an index stock to protect my entire portfolio? How many puts and for what term? And how much would it cost?

I think that the right course for a very dangerous market is to do what I am doing. The only safer course is to get out of the market or reduce exposure. That is also what I do when I think it is the right thing to do.

These are all things my brain tells me. My emotions sometimes do not agree.
More...

Some will disagree on principle, but I follow your reasoning that you're hedged via proximity. You can't adequately hedge these deep itm verticals w/o obliterating the income. The hedge would become the primary risk.

I think many would agree that the credit received is a significant percentage of the bid-offer variance. Microstructure risks [bid-ask vol] rise with option volatility.
 
Today's activity:

SOLD: 6 RTI SEPT 30/35 @ 3.55
stock at 38.5, net LOSS 226
(no longer DITM, no reason to stay with pos.)

SOLD: 5 PTR DEC 105/110 @ 3.35
stock at 128.4, net LOSS 339
(still DITM but news is not encouraging, and stock price has slipped a lot)

SOLD: 4 POT SEPT 105/110 @ 4.75
stock at 226.45, net gain 288
(take early gain, dangerously DITM)

COMMENTS: Last week I read on ET that IB does allow spread trades in IRA account. I just had time to check it out yesterday. Spreads were not allowed 2 years ago, and I am very happy that this type of trade is now allowed for IRAs.

Weekly P&L:
Not much activity.
Total transactions in thread: 27
Profitable transactions: 18 for 7297.40
Loses: 9 for 1958.40

Net gain: 5339.00

Thanks to other contributors, you make the thread more interesting and useful.
 
Some points related to trading passive gamma. You're essentially replicating the position of a long equity investor, down to the IRA account. Your hit-rate will be high at the expense of risk-reward, which is known.

You may want to consider selling gut-premium with a short delta bias. Two rules of thought. A rollover strategy sells vol regardless of relative-value. In this case you would lean short delta to earn on direction at the expense of the inevitable rise in strip-vol should the market trade into your deltas. You earn on skew/sticky-delta/strike contamination, net of strip exposure, but strip risk exceeds skew gains. A minor disadvantage.

In a high vol/rollover you would want to maintain a short delta bias as losses to delta in a rally would be compensated by a drop in strip volatility. You lose from skew, net of stip-exposure. Strip vol exposure will exceed skew risk, an advantage.

Trading some long-spot to neutralize your global deltas will lean-out the portfolio.
 
Kind of an off subject comment here but, awhile ago I looked at most of the vertical spreads I had done over the last 5 years and realized that if I had taken the amount of money that was at risk in the spread and just spent that same amount on naked calls, I would have been much further ahead. On the trades where I lost $ on the spreads at expiration, I would have lost the same amount with fewer naked options, and on the spreads that made $ I left alot of $ on the table compared to having the fewer naked options. Made me reevaluate the supposed wisdom of spreads and the recklisness of naked options.
 
I think I'm at the point, in this journal, where interested parties fully understand what my investing approach is based on. No further amount of clarification is needed. My credibility is based on results only. My record is good but hardly stellar, true I have doubled my account in two and a half years, but also true is that my account now in June is only 10K higher than it was in late Dec. 07.

Also true is that most of my spreads expire between Oct. and late Jan, and there is not much excitement in watching grass grow in the meantime. So I think I should post less frequently. I will still maintain a log of daily trades, but will only post them approximately weekly. If the market does dramatic things, I may post more often to keep up with things while the action is fresh in the minds of all.

I still encourage comments and questions from interested folks. I’m mentioning all this because I don’t want my less frequent posts to discourage any who may be inclined towards this type of strategy.

************************

That all said – there is the matter of atticus’ last post. A post that less than 0.2% of the population of the English speaking world could understand. More people have a good understanding of Einstein’s Special Theory of Relativity, and the math behind it, than could understand atticus’ post.

I am not intimidated however. I am not cowed. I stand proudly alongside such giants as John Needham (who makes incredibly accurate market predictions based on his world famous Danialcodes derived from biblical references) and Robert Taylor (founder of XYBER9 and frequent advertiser on CNBC, whose also world famous market predictions are based on the subtle changes of the earth’s gravity due to celestial bodies – primarily sun and moon – have on the human psyche). Yes, we stand together, proclaiming in one voice that “The End justifies the Means.”

Atticus is well meaning, no doubt, and those lofty few who understood his post will certainly benefit. I think he was giving valuable advice on how to best manage DITM put credit spreads under difficult market situations, but he could just have easily been passing a secret message to Bin Laden. Perhaps someone could interpret in layman’s terms.

His phrase “Trading some long-spot to neutralize your global deltas will lean-out the portfolio.” is particularly curious, and potentially useful. What does this mean?
 
I am not intentionally obscure. I tend to throw out concepts and elaborate in subsequent posts. The spot comment related to buying the underlying to hedge the bear-delta short volatility recommendation.
 
Chris- From the standpoint of the DITM strategy, COP is not a great candidate. That’s why I only have a small position.

3 COP NOV 55/60
4 COP JAN 60/65

I would like to have a bigger position, but when I look at the spread possibilities I can’t find deep enough spreads for me to feel comfortable. Take the Jan spread, I paid 3.7 for it and now it is priced at 4.5 ballpark. The stock is at 94. So I have to be happy with my positions, but I can’t put on new spreads.

As I look at the yahoo options now, I can put on a NOV 70/75 spread for about 4.3. Too costly. I would not feel secure with spreads above that, like 75/80. When I look at the chart I see that my ideal comfort zone would be 65/70 and I would be stretching my comfort level at 70/75.

So, a little long-winded but the risk/reward is not to my liking. Un fortunately that is true of most of the major oil companies, so I also have a small position in XOM. Many of the companies I would like to invest in just don’t have enough volatility to reward DITM spreads.

I can only open positions in COP or other majors when the stock is hit hard and low priced.

The service companies are more volatile, and easier to open positions in.
 
I've sold all my energy stocks and only have RIG and NOV left and won't be going long energy until I see a breakthrough or big pullback.
But just for info, I'd like to see what date you bought the COP spreads and what you paid for the long call and received for the short call. I had been putting on spreads ( not DIM though) on COP, GSF and other oil related stocks and as I said earlier, always seemed to be kicking myself in the butt for taking in a few hundred on the spread and leaving a thousand or so on each of the longs.
 
Chris - you can look up the prices I paid by downloading my portfolio, and guess at the date from that. But this strategy is a conservative option strategy, not for traders, I think, more for investing.
 
You must log in or register to reply here.
Back
Top