Easy options question for new trader

Algo 52 said:
cdcaveman: Thanks for your suggestion. I am completely clueless on how to use options. What would be the advantage of the put back spread strategy vs. just buying OTM puts?

I want to do this as simply and cheaply as possible. So in my mind I was thinking that I'd want no payout until I reached my loss threshold. In any decline past my loss threshold the option payout would offset the loss to my XIV and short VXX portfolio.

Thanks,

Steve
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a deep otm backspread is only a black swan hedge... as a decent outside move you can lose ... this would only be a hedge to keep you from blowing out.. you have to run a bunch of simulations.. build a model, run it through different types of markets.. likely you will often have to put the backspread on at a small debit.. small price to pay for a couple hundred point move in ES , or spy.. your from my understanding not tryign to hedge a small move.. but huge jumps
 
Thanks everyone for your posts. Sorry for not answering. I was expecting to be notified when there was a new post on the thread and I never got one.

Jonny1lot I don't know anything about delta so I am sorry, I don't understand your question.

Water7 and kmiklas: No, my algorithm tells me at the end of each day if I should be in VXX or XIV for the next day. If the algorithm says to be in XIV and I was already I hold the position overnight and consult the algorithm near the end of trading the following day. If it says XIV and I had been in VXX, I sell the VXX and open a XIV position which I hold overnight and through the next day.

CDcaveman: You stated exactly what I am trying to do. I want a deep OTM black swan hedge. I will expect to lose literally 99.99% of the time. I HOPE to lose 100% of the time! But next time a couple of airplanes crash into the skyscrapers in NYC, I won't be wiped out.

I recognize that I am going to have to build a model and run simulations. But in general, I'm wondering should I be looking at weekly options that need to be renewed each week or monthlies? A couple of people have mentioned financing my puts by (I assume) selling other options. Is this the right way to go?

Also water7: I can absolutely do the same thing with VXX. In fact, that would be my preferred way of accomplishing what I want to do. This is because the correlation between VXX and XIV is nearly 1 to 1. I can buy VIX futures but the correlation between XIV and VIX is significantly worse and the correlation between SPX and XIV worse still.

My concern was that the VXX option market would likely be the least traded of the options we are talking about. Whereas the SPX would be the most traded. Suppose I learn that only 5 people are selling VXX options, wouldn't I be better off going to the SPX market where thousands of people are buying and selling? Or perhaps, maybe this isn't a valid concern.

One last question. Suppose I buy a put on the SPX or a call on VXX and there is a catastrophic event. Do I have a guarantee that the counter party will pay up? Or do I run the risk that they get wiped out as well and I can never get my payout?

Thanks all for your help!!

Steve
 
And I see now why I didn't get notified. I have to visit the site each time there is a post or I don't get any further notifications.
 
Algo 52 said:
kmiklas: No, my algorithm tells me at the end of each day if I should be in VXX or XIV for the next day. If the algorithm says to be in XIV and I was already I hold the position overnight and consult the algorithm near the end of trading the following day. If it says XIV and I had been in VXX, I sell the VXX and open a XIV position which I hold overnight and through the next day.
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Where did you get this algorithm?
 
Algorithm "smells-like"; @EOD: IF (/VX -VIX) crosses below zero THEN Sell VXX and BUY XIV; IF (/VX - VIX) crosses above zero THEN Sell XIV and BUY VXX; resulting in about 20 trades/year. But very profitable.
 
Algo 52 said:
Jonny1lot I don't know anything about delta so I am sorry, I don't understand your question.

Water7 and kmiklas: No, my algorithm tells me at the end of each day if I should be in VXX or XIV for the next day. If the algorithm says to be in XIV and I was already I hold the position overnight and consult the algorithm near the end of trading the following day. If it says XIV and I had been in VXX, I sell the VXX and open a XIV position which I hold overnight and through the next day.
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ok i understand what you are doing
i wont discuss your vol trade approach here (another topic maybe)

since you are new to options, it would be wise to learn basic options trading first (before you start hedging / trading with options)
while at the same time you keep improving your setup and find another way to reduce risk
(ex: different sizing and scaling step)


Algo 52 said:
CDcaveman: You stated exactly what I am trying to do. I want a deep OTM black swan hedge. I will expect to lose literally 99.99% of the time. I HOPE to lose 100% of the time! But next time a couple of airplanes crash into the skyscrapers in NYC, I won't be wiped out.

I recognize that I am going to have to build a model and run simulations. But in general, I'm wondering should I be looking at weekly options that need to be renewed each week or monthlies? A couple of people have mentioned financing my puts by (I assume) selling other options. Is this the right way to go?
More...

weekly or monthly.. depends on your main trade holding period and risk preference
you can try different setup, using single options/ simple verticals
find out the one fits your trading style

options hedging wont come "cheap" as it reduce your profitability and probability
but hopefully "cheap" enough to improve your risk and reward


Algo 52 said:
My concern was that the VXX option market would likely be the least traded of the options we are talking about. Whereas the SPX would be the most traded. Suppose I learn that only 5 people are selling VXX options, wouldn't I be better off going to the SPX market where thousands of people are buying and selling? Or perhaps, maybe this isn't a valid concern.
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if you trade VXX, then use VXX options
dont worry.. it is very liquid and have a good fill for simple spreads


good luck..
 
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