Delta Neutral Hedging with Positive Gamma

[ETraderJoe]

What's your opinion on using a delta neutral positive gamma strategy to repair a losing short put?

Here're details on the strategy:
http://www.optiontradingpedia.com/answers/repairing_losing_short_put_options.htm

 

[Robert Morse]

Bad idea.

 

[TheBigShort]

Hey trader Joe,
There are so many naive thoughts in that article I am not to sure where to begin. I think you should discard it. If you sell a put, you have to have a reason for selling it. Lets say your reason is "IV is high and I think the markets will rally". When the markets instead continue to drop and IV continues to go higher. You have to ask yourself if you are still right. If not, close the damn position and move on.

 

[El OchoCinco]

"MY ADVISOR SOLD TO OPEN A NAKED PUT. HE ABANDONED MY ACCOUNT THE STOCK IS PLUNGING DOWN IS THERE ANY STRATEGY TO RECOVER THE LOSS?"

Typical bullshit from "experts" The position is going against you and you think there is a magic wand to suddenly make it risk free. If there was a strategy to recover the loss why would anyone take a loss??? Unless the underlying cooperates praying and clenching does not work.

 

[SmallFry]

Hey trader Joe,
There are so many naive thoughts in that article I am not to sure where to begin. I think you should discard it. If you sell a put, you have to have a reason for selling it. Lets say your reason is "IV is high and I think the markets will rally". When the markets instead continue to drop and IV continues to go higher. You have to ask yourself if you are still right. If not, close the damn position and move on.

Yeah, most option “repair” strategies are just adding more risk. I look at them as seperate trades. Should have a reason to put a new trade on looking at new context, than just to revenge a previous one.

 

[TheBigShort]

Yeah, most option “repair” strategies are just adding more risk. I look at them as seperate trades. Should have a reason to put a new trade on looking at new context, than just to revenge a previous one.

Well you got to ask yourself, if there is a "repair" strategy, Why not just put it on in the first place before the damage is done? You can also tell the guy in the article is a rookie when he states "delta neutral gamma positive hedging is perhaps the best way..." he's just trying to look sophisticated.

 

[ETraderJoe]

Good to know, guys, thanks for sharing your thoughts.

 

[tommcginnis]

I'm not sure if this is a cautionary tale or not.
https://www.elitetrader.com/et/threads/repair-strategy-for-nflx-short-put.322986/
OP sold a $400 NFLX put, and promptly had it hit $340 on him.
Many here said, "Best move is to exit now. Take the loss."

I offered that he could buy himself $10 down for about $2.50, and recover that with a $2.50 call vertical that would not be below the put strike (a no-no).
OP thanked me, but I countered with "Hey! Premature! The Fun is not over!" and to prepare his exits.

He wrote me privately, and I *think* he'd bought out early the next day (with a big ol' rebound), and then sold a call spread. That should spell a fair success.

But NFLX??? Since mid-July, it's broken again down from that $370-$380 rebound, passed $340 a week or so back , and today, is camped just above $325. YES, "$325."

If the OP had aggressively sold/bought-back those call verticals on weeklys, it's possible that they might be able to nearly keep up with NFLX's descent. But I'll say it again: taking "stalling" positions keeps your ass in the wind. If your original goal was to own the stock at a discount, you've got that, and that assuages somewhat the loss from your pick. But if you truly, unwisely, sold the position *without* really wanting the stock, then you really need to examine your current thesis on it:
Do you think it's worth a fight? (The stock, not the position.)
If you think it is, then you're all set. "Stall" away, just know that your ass continues in the wind.
But if you *hate* the stock, just as if you had just bought it, you need to exit, not prolong.

 

[SmallFry]

I'm not sure if this is a cautionary tale or not.
https://www.elitetrader.com/et/threads/repair-strategy-for-nflx-short-put.322986/
OP sold a $400 NFLX put, and promptly had it hit $340 on him.
Many here said, "Best move is to exit now. Take the loss."

I offered that he could buy himself $10 down for about $2.50, and recover that with a $2.50 call vertical that would not be below the put strike (a no-no).
OP thanked me, but I countered with "Hey! Premature! The Fun is not over!" and to prepare his exits.

He wrote me privately, and I *think* he'd bought out early the next day (with a big ol' rebound), and then sold a call spread. That should spell a fair success.

But NFLX??? Since mid-July, it's broken again down from that $370-$380 rebound, passed $340 a week or so back , and today, is camped just above $325. YES, "$325."

If the OP had aggressively sold/bought-back those call verticals on weeklys, it's possible that they might be able to nearly keep up with NFLX's descent. But I'll say it again: taking "stalling" positions keeps your ass in the wind. If your original goal was to own the stock at a discount, you've got that, and that assuages somewhat the loss from your pick. But if you truly, unwisely, sold the position *without* really wanting the stock, then you really need to examine your current thesis on it:
Do you think it's worth a fight? (The stock, not the position.)
If you think it is, then you're all set. "Stall" away, just know that your ass continues in the wind.
But if you *hate* the stock, just as if you had just bought it, you need to exit, not prolong.

Yup. I'm glad it worked out for him in the end. If NFLX direction went against his new position (whether with or against the wind) it would be a different story. He could have been worse off than he was, especially when possibly making decisions emotionally after a losing a big bet amount (IIRC).