Hedging big overnight moves?

[spindr0]

Quote from heech:

Yes, but a stock with beta of 2.0 will also move down twice as much as the market index... Sorry if I wasn't clear, but I'm really needing something that hedges directions in either directions. Thus the strangle. I want to get paid (+10%) for a big overnight move (+5% or -5%).

It doesn't matter if the beta is 2.0 or 1/2. If you want a 2:1 gain from a directional move, you buy the higher beta and sell the lower.

The fantasy is wanting to collect 10% on a 5% move and pay 5% for a 10% move... or something like that (g). IOW, you can set something up that will pay you twice as much as the index's move but it's likely to cost more and lose more with no move (you can't have it both ways).

 

[heech]

I'm playing with Option Oracle, a tool I'm not too familiar with... but perhaps someone else can take a look at the numbers for me and see if I'm way off base.

I'm looking at SPY, just wanted a broad index with tiny spreads. April expiration...

- long 100 contracts call @ 80 ($1.83)
- long 100 contracts put @ 72 ($2.25)

Total cost: ~$40k.

The spread looks really tight... ask/bid gap of a penny.

Idea is I buy it today (well, hyothetically Friday afternoon) right before close. I sell it on the open.

If tomorrow morning, SPY opens up 5%... Option Oracle claims the above strangle will be +17%, or $7k. If SPY opens down 5%, it will be +10%, or $4k. But I will probably lose ~$1k if SPY opens up right around today's close.

Does that sound right?

 

[luckyd1976]

Quote from heech:

I'm playing with Option Oracle, a tool I'm not too familiar with... but perhaps someone else can take a look at the numbers for me and see if I'm way off base.

I'm looking at SPY, just wanted a broad index with tiny spreads. April expiration...

- long 100 contracts call @ 80 ($1.83)
- long 100 contracts put @ 72 ($2.25)

Total cost: ~$40k.

The spread looks really tight... ask/bid gap of a penny.

Idea is I buy it today (well, hyothetically Friday afternoon) right before close. I sell it on the open.

If tomorrow morning, SPY opens up 5%... Option Oracle claims the above strangle will be +17%, or $7k. If SPY opens down 5%, it will be +10%, or $4k. But I will probably lose ~$1k if SPY opens up right around today's close.

Does that sound right?

That doesnt sound right at all, to me.

SPY $76.09
Strangle

APR 80 Calls .SZCDB
APR 72 Puts .SZCPT
For a Debit of no more than $4.08

That strangle would need a HUGE MOVE to payoff. ONLY a move outside of the Range of $67.92-$84.08 (-10% and/or +10.5%) would cover the losses.

 

[dagnyt]

Quote from luckyd1976:

ONLY a move outside of the Range of $67.92-$84.08 (-10% and/or +10.5%) would cover the losses.

He is NOT looking to hold to expiration.

You are way of base.

Mark

 

[spindr0]

If tomorrow morning, SPY opens up 5%... Option Oracle claims the above strangle will be +17%, or $7k. If SPY opens down 5%, it will be +10%, or $4k. But I will probably lose ~$1k if SPY opens up right around today's close. Does that sound right?

It sounds possible but you'd have to use a pricing formula to be sure.

There are several problems with such an analyses and I don't know about Option Oracle or how it handles it. The main one is that most likely, the two options have different IV's. Are the valuation projections based on the respective IV's or is the program using the average IV? You can get very different results.

I don't think that you're going to find the in/out every day to be productive but that remains to be seen. However, there's always the possibility of a momentum day and unloading the losing option leg at the open and riding the winning leg as far as you can.

And just to make things more complicated, you can trade (hedge with) the underlying during the pre and post market for 100 delta hedging. It won't handle the overnight or the gap but it's certainly a possible tool to utilize.

 

[spindr0]

That strangle would need a HUGE MOVE to payoff. ONLY a move outside of the Range of $67.92-$84.08 (-10% and/or +10.5%) would cover the losses.

Your numbers are correct on an expiration basis. Prior to that, the strangle will make money on smaller moves and will have much narrower breakeven points.

 

[heech]

Quote from spindr0:
Are the valuation projections based on the respective IV's or is the program using the average IV?

Option Oracle is configurable, and claims to be using option-specific (and I would take that to mean leg-specific) IV.

Appreciate the tactical advice on the momentum trade, will consider that as well. Sounds like this is worth giving a try.

I think my mistake earlier was looking at options for SSO, thinking I could use the extra leverage. But that comes at expense of a really wide spread...

 

[luckyd1976]

Quote from spindr0:

Your numbers are correct on an expiration basis. Prior to that, the strangle will make money on smaller moves and will have much narrower breakeven points.

Obviously not an active Strangle player...

Like this weekend MAR expirations. I get what he's trying to do. Monthly Exp, big move mondays. Capture the moves (using APR Strangle) with Increased IV on the winning side, dumpin the losing side quickly, etc... But I just dont see it as a good risk/reward play. More often than not, Not a big enough move to even cover your theta and losing side losses. I just dont see it.

 

[zdreg]

KISS.

what makes you think that u can beat the pros on the floor?

 

[heech]

Quote from luckyd1976:
Like this weekend MAR expirations. I get what he's trying to do. Monthly Exp, big move mondays. Capture the moves (using APR Strangle) with Increased IV on the winning side, dumpin the losing side quickly, etc... But I just dont see it as a good risk/reward play. More often than not, Not a big enough move to even cover your theta and losing side losses. I just dont see it. [/B]

That's not at all right, actually. I expect this position to be a loser, on average.

This is only one leg of a larger strategy. I'm thinking of using this straddle as a hedge for other positions I'm holding, positions that are hurt by large overnight moves.

So, I'm not expecting to use this leg for returns... it's something that's negatively correlated/contrary to the rest of my strategy, help dampen the volatility.