Hedging SPX option with /ES

[marwanco]

Hi all, I have in mind the following strategy,

Selling weakly SPX options straddle, on last day of expiration, and hedging with 1 /ES contract if the price of SPX aproaches breakeven points, if trend continue past breakeven, do nothing.
If trend reverses remove /ES hedge, and so on.

Straddle price around 1700$ (VIX=19), my goal to defend that price, best scenario to keep the full amount , the worst having 0 Loss.
I might buy the hedge couple of time, every time it will cost me 1 point ($50)

Even last hour befor expiration there is some money in SPX options.

Does this make sense , or I have a faulty logic?

Thanks

 

[sle]

weakly <***> straddle

"She straddled him weakly"

It makes sense, but you are probably going to pay a lot of transaction costs vs the expected decay. Also, don't do it blindly but rather develop some way to decide if the intraday volatility is rich.

 

[JSOP]

And expect the spread of the SPX option to be extremely large especially when the volatility is high. Just because there is still value left on the option near expiration doesn't mean you are going to be filled at that price filled at all if you actually enter in an order. What you see is not what you are gonna get. Liquidity towards market closing on expiration day especially is really poor. Just be prepared.

 

[iprome]

hedging with 1 /ES contract if the price of SPX aproaches breakeven points, if trend continue past breakeven, do nothing. If trend reverses remove /ES hedge, and so on.

1. I think you need 2 /ES, not 1. Unless you do ES options instead of SPX.

2. Define "approach", "continue past breakeven", "trend reverse" quantitatively, and back-test your strategy. If fudge factors are involved in any of the three decisions above, each whipsaw could eat up twice the fudge factors; multiple whipsaws could eat up the entire straddle premium.

3. Does strike selection make a difference? Need to explore and test.

 

[ZBZB]

Google, what markets trend best.