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Grinding it out, day after day
- Thread starter lescor
- Start date
Hi Lescor,
I guess the strategy you explained below was the primary reason why you had the big win on Friday...?? Or was some other strategy the major reason?
thanks,
Walt
I guess the strategy you explained below was the primary reason why you had the big win on Friday...?? Or was some other strategy the major reason?
thanks,
Walt
Quote from lescor:
Some better assumptions in those recent posts. First of all, as I've posted before, some people, probably new traders or those who don't trade equities, assume that stocks move tick for tick with the market. Simply not true. Mike is right, 50 individual long stocks worth X$ is not the same as X$ worth of spy.
In a nutshell, I'm trying to buy stocks at a discount to the market and sell those that are overvalued. The median line on what I consider under or over valued is my own assumption, or proprietary calculation if you like. So if I buy a stock at a discount, and hedge it with a spy short, I want the spread between those stocks to narrow, irregardless of market direction. It's not a net zero position. There are many factors that go into when or by how much I hedge. Volatility, time, total exposure, valuation, sectors, etc. This is all pretty simple spread / arb stuff or whatever you want to call it. A million guys are doing stuff like this, just that everyone has their own way of applying it and how they operate. And yes, in a high volatility, fearful environment, on expiration day to boot, things get more out of line and the profit margins go up accordingly.
Quote from Rehoboth:
Mike has this correct. Closing out stock does not mimic what lescor is trying to do. He has positions that will outperform the market for a given time frame. If the market had gone down, those positions will have also gone down, just to a lesser extent then the SPY.
Lescor probably has a atr/beta/dollar netural spy amount per position that he enters. So he would probably not be dollar neutral, but market neutral based on his system.
Let me articulate concisely: to "hedge" something literally means freeze its current value from decay or appreciation alike. You cannot "hedge" something from further loss while preserving total gain regardless. The only way to do that is by placing fixed exit stops to prevent loss from a specific point. Anything else is nothing more than an offset spread.
Whatever x-amount of beta lescor hedges with lower-beta spy is exactly the same, identical result as closing out that amount of estimated beta in the first place. Yes, I understand all the variables involved, etc. I assumed we all had a similar understanding when I wrote before.
Bottom line is this: hedging or closing/opening trades has nearly identical results in the end. There is a great misconception that to "hedge" means cap further loss while preserving total future potential gains. Not true. A hedge spreads off risk at a cost of further reward from there.
So Lescor,
Are you "pairs/spread trading" with the SPY? ...
Walt
Good god Walt... the endless thoughtless questions are so annoying. Do you bother reading what Lescor actually writes or are you just dazzled by the numbers he's put up?
Lescor has stated before that he occassionally hedges using SPY if his exposure is too large. That is not the same as pairs trading using SPY as a strategy. And the "strategy" in the above post is not a strategy at all. It's more an overview of the type of trading he does.
Sorry Lescor. I just really wanted to chip in to say thanks for the thread. It is the only one on ET that I am checking on a regular basis these days. You are probably the biggest inspiration on the whole site to me (end of embarassing man-love speech...). Cheers
Quote from austinp:
Let me articulate concisely: to "hedge" something literally means freeze its current value from decay or appreciation alike. You cannot "hedge" something from further loss while preserving total gain regardless. The only way to do that is by placing fixed exit stops to prevent loss from a specific point. Anything else is nothing more than an offset spread.
Whatever x-amount of beta lescor hedges with lower-beta spy is exactly the same, identical result as closing out that amount of estimated beta in the first place. Yes, I understand all the variables involved, etc. I assumed we all had a similar understanding when I wrote before.
Bottom line is this: hedging or closing/opening trades has nearly identical results in the end. There is a great misconception that to "hedge" means cap further loss while preserving total future potential gains. Not true. A hedge spreads off risk at a cost of further reward from there.
I still disagree with everything above. Hedging is about reducing risk, not about reducing reward. The reduction in reward is usually the consequence.
http://www.merriam-webster.com/dictionary/hedge
Lescor- I am sure today was another huge day with all of the volatility.... keep us posted.
Quote from Rehoboth:
I still disagree with everything above. Hedging is about reducing risk, not about reducing reward. The reduction in reward is usually the consequence.
http://www.merriam-webster.com/dictionary/hedge
well, you have every right to disagree. but the fact remains same: to hedge risk is to reduce or remove risk. when taking an opposing trade in something that affects the open trade, what you have effectively done is closed part or all of the initial open trade and/or its favorable leverage.
hey, there are many people out there who actually believe they can be long a symbol in one account, short in the other and have two open positions hedged. trying to explain that they have no position in the market with an open short and open long sails right over their heads
Quote from austinp:
well, you have every right to disagree. but the fact remains same: to hedge risk is to reduce or remove risk. when taking an opposing trade in something that affects the open trade, what you have effectively done is closed part or all of the initial open trade and/or its favorable leverage.
hey, there are many people out there who actually believe they can be long a symbol in one account, short in the other and have two open positions hedged. trying to explain that they have no position in the market with an open short and open long sails right over their heads
Look here scooby doo, hedging on the ES because its simple & fast to secure a large position because you don't want to sell it. You just want protection against downside, but not to sell the holdings. Liquidity is diffferent in stocks, when you sell it, you might not be able to get back in later with the same amount at near value prices.
I think both of you are arguing both sides of the same coin.
If you know 99% of the time your trades will be profitable, it might be wise to hedge the position if it starts going against you to minimize the 1% probability of loss. Also as someone mentioned above, the question of liquidity in low volume stocks. You may not be able to get out at a good price even if you wanted to.
It's like the guys who short mortgage derivatives starting 2005. Every one of them knew housing would blow up but a few made the big money. The guys who made money figured out how to hedge and stay in their positions as the market went against them.
For a directional trade such as a intraday-ES position, hedging makes no sense. Better to exit and re-asses the market. Hedging makes sense in some scenarios, and makes no sense in other scenarios. Depends on your style, markets traded etc. Hedging also helps the psychology of the game. If you are levered up to high 7 figures intraday, hedging may help your mental game.
If you know 99% of the time your trades will be profitable, it might be wise to hedge the position if it starts going against you to minimize the 1% probability of loss. Also as someone mentioned above, the question of liquidity in low volume stocks. You may not be able to get out at a good price even if you wanted to.
It's like the guys who short mortgage derivatives starting 2005. Every one of them knew housing would blow up but a few made the big money. The guys who made money figured out how to hedge and stay in their positions as the market went against them.
For a directional trade such as a intraday-ES position, hedging makes no sense. Better to exit and re-asses the market. Hedging makes sense in some scenarios, and makes no sense in other scenarios. Depends on your style, markets traded etc. Hedging also helps the psychology of the game. If you are levered up to high 7 figures intraday, hedging may help your mental game.
Quote from austinp:
well, you have every right to disagree. but the fact remains same: to hedge risk is to reduce or remove risk. when taking an opposing trade in something that affects the open trade, what you have effectively done is closed part or all of the initial open trade and/or its favorable leverage.
hey, there are many people out there who actually believe they can be long a symbol in one account, short in the other and have two open positions hedged. trying to explain that they have no position in the market with an open short and open long sails right over their heads
Question for lescor, or anyone who would like to chime in. Considering what happened on may 6, would you maintain a seperate account on another exchange incase execution went down on equities and you needed to hedge? How about a direct line to the SP pit? Managing million dollar positions is something not to be taking lightly and any advice would be helpful thanks.