Hedging for OEX/XEO Spreads

T

taigong

This is an invitation for comment from the veteran optioneers, from whose posts here I have learned quite a lot.

I have been experimenting with various options strategies and now decided to focus more on OEX vertical spreads, one leg at a time and, if opportunity arises, morph the position into a short condor.

As OEX spreads execution are sporadic (sometimes no quick fill even if I give away 10 cents), I always thought there should be some hedging strategy in place just in case the market goes against me. This morning's huge gap open brought this to the forefront of my mind again.

Here is what I think I should do with OEF as an hedging instrument, assuming I am -20 delta in a call spread (one lot):

OEX current price: 560 (Value = 560 x 100 = 56000)
OEF current price: 56 (equivalent value = 56x x 1000 = 56000)

Since I am -20 delta, buy 800 OEF to for my position to be delta neutral for the time being (capital outlay: 56 x 800 = 44800).

Or, since OEF is less liquid, it is probably more efficient to use SPY since the two trade in line. So, buy about 400 of SPY, assuming SPY at 114 to be delta neutral (44800/114 = 392, rounding it up to 400).

I do not have math or engeering background, so I am not sure if my calculation is all correct, and I have a feeling that the capital outlay for hedging may be too large for the amount at risk. So I post my thought here for veterans to comment.

Thanks in advance.

tc
 
Hmm, didn't think of ES in this case. Just afraid that ES is a beast compared to the relatively tame credit spread.

tc
 
Quote from taigong:

Hmm, didn't think of ES in this case. Just afraid that ES is a beast compared to the relatively tame credit spread.

tc
More...

You wouldn't be speculating with it, you'd be using it to hedge your deltas. Plus, on anything but the shortest intraday timeframes, the ES is generally no more volatile than the OEX.

And on another note, be careful with OEX credits here. As I'm sure you know, vol and premiums are very low. Thus, to generate any meaningful risk:reward ratio, you'll be living with quite a bit of gamma risk. So while you're on the right track to be thinking of hedging strategies before embarking on this, it's not the trade it was a year ago with Vix over 30. Good luck.
 
Thanks, Hello Dollar, for your comment.

If I had bought ES pre-mkt today at 1140, a realistic entry, I could have made 3-4 points quickly, enough to make up for the loss in the short credit call on OEX. After all, -20 delta is not a lot. But then again, I am afraid I would be tempted to just long and short ES for quick profits (hopefully), thus screwing up the original intent and inviting bigger loss. I day traded ES on and off last year, withouth much consistent success. So I decided to stay away from ES for some time and concentrate on stocks. OEX credit spread is just something I want to keep experimenting with. I did 5-6 such spreads last year, with one loss. Not bad at all, but I always felt I needed a hedging plan before I can do multiple lots.

Yes, I am aware of low vol in general during last year. I was very tempted to put on a short put spread a few days ago when vol spiked on terrorism, but held back because of lack of hedging strategy. Maybe "what the heck" is the way to go, ;-)

Thanks again. Enjoy your weekend.

tc
 
I woke up this morning realizing my calculation in the start of this thread was wrong after all.

Since I am only short -20 delta, I should only buy 200 of OEF or the equivalent $ amount of SPY for a temporary hedge.
 
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