Hedge my ITM leap position - need help
- Thread starter seotrader
- Start date
i agree with spindrO.
the risk reward ratio of the calendar is much better ,than the naked put.
right now jan put is 8.5,dec is 3.10 the spread costs 5.4......
instead of buying 2 puts for 17,u can buy 3 spreads for 16.2
the thing with the calendars is,that u have to close it if it hits the stike of the spread......u will make money still,and depending of the time it happened,might be much more that the naked long puts......
u have a relation between the delta and the theta-your short option bleeds much faster that the long.....
dont forget,that the short expires in 20 days-in google makes a move down ,as closer is to expir.,a more money u may make,than with the nakeds.
for the same money u have 1 long option more,against ....if u go to 560,this spread will make much better returns,that the naked 2 options(dependning of when it occurs)
and this was an example-u can use diferent strikes on the calendars-
buy 1 at 550,buy 1 at 530,buy 1 at 510......
500 strike can make u 600-800%......
the only thing is,that u cash the profit always ,if your stike is hit.otherwise u start taking risk.
google make usually 5% correction...so with every move of 10$ up u buy 1 callendar 5% out.
if google is 580,goes to 590-buy one at 560......if it goes from 590 to 600,buy another one at 570......
take how u will build the hedge position.
and if it starts to fall u will have calendars at different stikes,wich u can start closing if google goes near them.
that what u can do the first 2 weeks ...the last two week before exp,it get more usseless,because the short options with 5% out are getting very cheap...they already bled too much.
jsut use option calculator to get more feel of the sreads-how they change with time,than make your calculations...prize diferend senarios of what may happen and when.....like you give 10% chance google to go to 530,20 % chance that google goes to 560,30% chance,that gugle goes to 610........and so on....within a 1 month time frame......and than do your spreads on that.
but with calendars u have the time on your side,which is hell of an edge.
hello acen1975
looks like a very nice hedge strategy ! thanks
I need to check it more carefully
I notice that thinkorswim platform ( Analyize -> risk profile) has some mistakes in the risk graph.
Do you have more accurate software to run simulations? I prefer that then just enter values to a black scholes calculator
What I already understand that your strategy must do is -
Because we pay almost every month insurance - lets say 3 calenders each time for a cost of approx 500$ ( after we closed the 3 calenders after 1 month) ,
We have to be sure that when the stock actually drops it will covered our LEAP loss + the credit we payed for the calender. otherwise to lose every month 500$ for insurance will be expensive
From you experience , how did it work for you?
looks like a very nice hedge strategy ! thanks
I need to check it more carefully
I notice that thinkorswim platform ( Analyize -> risk profile) has some mistakes in the risk graph.
Do you have more accurate software to run simulations? I prefer that then just enter values to a black scholes calculator
What I already understand that your strategy must do is -
Because we pay almost every month insurance - lets say 3 calenders each time for a cost of approx 500$ ( after we closed the 3 calenders after 1 month) ,
We have to be sure that when the stock actually drops it will covered our LEAP loss + the credit we payed for the calender. otherwise to lose every month 500$ for insurance will be expensive
From you experience , how did it work for you?
this is the best free software out that i know of...
download at:
http://www.samoasky.com/
its real time data,u have even vol.smile...
there u can play and get more used with calendars...u can also to put your own volatility and compare it with the change of time.,with is really important ,if u hedge either with long naked puts far OTM,or calendars OTM.
and for the OTM calendar another very important thing to understand is the delta bleed....is a secondary greek,derived between delta and theta.
its also called charm......do a goolge
search on it a try to get a feel on it.a lot of traders underestimate secondary greeks,or dont know them,but for the OTM calendars the charm is essentual tool for success.
obout your position-i think that the problem is no as much the hedge,than the position of its own.u lose the power of the options by closing 20 000$ in a single option for the prize of only 1 delta......too big risk,too less reward.....
the only plus u have is no lose of theta,but with leaps it doesnt really matter.your option did what it is supposed to do long time ago.
now u keep too much risk for nothing.
but thats my point of view...it can always be wrong.....
good luck
Quote from acen1975:
obout your position-i think that the problem is no as much the hedge,than the position of its own.u lose the power of the options by closing 20 000$ in a single option for the prize of only 1 delta......too big risk,too less reward.....
the only plus u have is no lose of theta,but with leaps it doesnt really matter.your option did what it is supposed to do long time ago.
now u keep too much risk for nothing.
but thats my point of view...it can always be wrong.....
good luck
Hello Acen,
Well I actually bought the 410 around 11,000$ and rolled it up to the 470$
I will roll up every time its possible to roll it to high delta strike.
So I'm not that crazy
I will check the software. thanks
Quote from seotrader:
Hello Acen,
Well I actually bought the 410 around 11,000$ and rolled it up to the 470$
I will roll up every time its possible to roll it to high delta strike.
So I'm not that crazy
I will check the software. thanks
thats a good solution.have u thought of splitting the ITM option into 2 ATM options?
the prize is the same.
if google continues to grow,deltas of the 2 ATM options ,which is 0.5*2=1......will accelerate to 2 deltas.
or to use only 1 ATM leap for 7 300$-and defend the up move with a dec/jan OTM call calendars.
lets check the senarios:
u have 1 470 leap with 0.80 delta:
google goes to 630=0.82*50=4100$
(i put 0.85,instead of 0.80 because of acceleration in the delta)
now-1 590 leap with 0.55 delta,for 6.850$.. your delta goes to 0.66...
so middle 0.60*5=3000$.....
than u buy 5 call OTM calendar spreads dec/jan @ 630 for 1 600$.
if google goes to 630 around exp-u make additional between 4 000 and 6 000$ dollars+3 000$ from the ATM leap-u make at least twice as much ,and your investment is 8 500$,compared with 14 300$ from the ITM leap.
or looked at percentage gain of investment,with ITM leap u make 30% for 20 days,with ATM leap+OTM cldr u make 70 to 100%.
if google breaks through 630 before exp,u have to close the calendar,but still u would have make 2000-3000 dollars on the position,but u will still make more money,the worst-the same,because you 1 ATM leap will go deep ITM,and will be almost the same delta,as the 470 one.
lets look the other way-google drops by exp to 540:
your leap will lose about 0.75*40=3000$
the other ATM leap will lose 0.45*40=1800$,and the calendar will lose 1.100...which is about the same amount on the down move.....but if it breaks throu that point ,the 470 starts losing more ,that the other.
now lets put some protection to both positions-the easiest way-naked long puts OTM jan(not to be eaten to much form theta and bleed on near month):
2 puts jan 550-8.50*2=1700$...
your position will cost 14 300+1700=16 000$...mine 8500+1700=10200$
if google falls to around 550,my position will be a winner-the gamma of the puts will boost my negative deltas more,than i will lose from the ATM leap on 590+ the loses from the calendar.
the 470 LEAP will continuing losing money somewhere to 530-520,where the other will continuing building gain at that levels......
lets now look where the ITM leap have better advantages,than the ATM leap+OTM cldr spreads:
it is only in the frame between 570 and 590 at dec exp.....
how u can hedge even that?
easy-buy 1 condor or buterfly with dec exp.....at this frame
they are cheap strategies with very little investment,but huge return of 100%-1000% in case u hit these levels at exp.(depending on how far u spread the wings)
thats the beauty of the options-u can make a bet on something in a lot different way......and to be successfull is in the experience of choosing the best frame-to profit as much as possible ,if u are right,a to lose as little as possible,if u are wrong....
there was somebody in this forum,who said it the best,but only i congratulated him for his kennedy interpretation.....i guess nobody else found the genius in his words...it was:
its not what your options can do for you,its what u can do for your options.....
there are some very sharp traders in these forums,the problem is that i rarely see them write.....most are forum clowns,from which u can get good beginner advice,but beware of the forum "professors",when it come to advanced matter.......
you might get more brain washing,than "enlightenment"
Acen,
Could you please list for us, line by line, the entire position you suggested below with whatever strikes, expiries and prices you would want--including the hedge part. This would be very helpful. Also, the OP mentioned that he/she found some errors in the analyze tab of ToS--do you know the details?
Could you please list for us, line by line, the entire position you suggested below with whatever strikes, expiries and prices you would want--including the hedge part. This would be very helpful. Also, the OP mentioned that he/she found some errors in the analyze tab of ToS--do you know the details?