Hedging the wheel

[destriero]

What word?

If I get assigned TQQQ and then short MNQ I'm at 0 Delta ish. I then sell covered calls against the TQQQ position. If TQQQ recovers or gets called, I'll BTC the MNQ short. The only risk I see is if I hold the MNQ short while TQQQ goes up past my assignment value. Why wouldn't this work?

so you’re zero delta (no position, locally) and you sell calls. You’re now explicitly short naked calls. Market rallies and either the TQQQ or MNQ outperforms. Regardless you’re running either a light hedge or you’re net short calls and spot. So market rallies and you are chasing the MNQ short, take the loss, and you’re in a TQQQ CC at a monetized loss.

Mkt drops are you’re essentially short naked calls. How does this differ from short naked calls other than hedge variability and really bad haircut?

I think you’re trolling at this point.

 

[BlueWaterSailor]

In balance?
Isn't 50 of SPY $19k and 1 ES is $195k? Maybe MES.

Yeah, /MES. I wasn't questioning your ability to trade futures, just M.W.'s statement that you can't hedge after assignment. Like... WTF?

 

[destriero]

I’ll add that the initial hedged position is 0-delta so mkt rallies a buck and you cover monetizing a $100 hedge loss. Market rallies and then drops a buck below your DCA. Now what? You’re going to chase it and hedge again? This is like espousing grid trading… that absurd FX system where you carry opposing positions in two accounts.

So no it’s not going to work. It’s TQQQ cash req reduced by the call credit + the req on the futures. All to carry short naked calls. It’s worse than naked calls due to microstructure (edge loss), comms, and haircut (margin). There is no argument you can make that wins on your ability to get in/out of the hedge, favorably.

 

[markthepadrone]

so you’re zero delta (no position, locally) and you sell calls. You’re now explicitly short naked calls. Market rallies and either the TQQQ or MNQ outperforms. Regardless you’re running either a light hedge or you’re net short calls and spot. So market rallies and you are chasing the MNQ short, take the loss, and you’re in a TQQQ CC at a monetized loss.

Mkt drops are you’re essentially short naked calls. How does this differ from short naked calls other than hedge variability and really bad haircut?

I think you’re trolling at this point.

I'm not trolling, maybe just a little stupid.

so you’re zero delta (no position, locally) and you sell calls.
> So far, so good.

You’re now explicitly short naked calls. Market rallies and either the TQQQ or MNQ outperforms.
> I'd only hold the MNQ short until TQQQ recovered to just shy of my assignment basis. So the MNQ BTC should be small.

Regardless you’re running either a light hedge or you’re net short calls and spot. So market rallies and you are chasing the MNQ short, take the loss, and you’re in a TQQQ CC at a monetized loss.
> Where does the loss come from? The short call strike is at my assignment basis. I just sold MNQ for just about what I paid for it. And, I collected the CC premium.

Mkt drops are you’re essentially short naked calls. How does this differ from short naked calls other than hedge variability and really bad haircut?
> I don't understand what you're saying here.

 

[destriero]

I'm not trolling, maybe just a little stupid.

so you’re zero delta (no position, locally) and you sell calls.
> So far, so good.

You’re now explicitly short naked calls. Market rallies and either the TQQQ or MNQ outperforms.
> I'd only hold the MNQ short until TQQQ recovered to just shy of my assignment basis. So the MNQ BTC should be small.

Regardless you’re running either a light hedge or you’re net short calls and spot. So market rallies and you are chasing the MNQ short, take the loss, and you’re in a TQQQ CC at a monetized loss.
> Where does the loss come from? The short call strike is at my assignment basis. I just sold MNQ for just about what I paid for it. And, I collected the CC premium.

Mkt drops are you’re essentially short naked calls. How does this differ from short naked calls other than hedge variability and really bad haircut?
> I don't understand what you're saying here.

I don’t dispute that (hold to recovery) but it wasn’t mentioned until now. Don’t you see that you’re not recovering anything as you have a zero delta position (locally) that won’t generate net deltas unless you fcked up the hedge? IOW unless you’ve got a bias (tracking error) you’re not recovering anything.

 

[markthepadrone]

I'm not trying to recover anything. That wouldn't make any sense if I'm trying to get a 0 Delta. I'm just trying to negate price fluctuations. All I want is the premiums for the shorts.

When I sell puts, I back them with cash so I can take the assignment. I just want to protect myself if TQQQ drops a huge amount after that while I'm selling the covered calls.

I want the MNQ short to 'adjust' my assignment cost basis so I can sell 30 Delta covered calls even if I own TQQQ way above the corresponding strike price.

It's to avoid the situation that someone else posted. He owns TQQQ at $70. TQQQ is around $25. Next weeks 30 Delta srike is around $26.5 If he had shorted MNQ, with rolling of course, when he got assigned, the $43.50 risk would be offset by the increased value of the MNQ short.

 

[newwurldmn]

As des said you convert your position to a naked call or a naked straddle. It’s a different risk and view. If you are adjusting the mnq then you are transferring to another risk.

When you sold the put originally it was just for income. You should have had a view on the return distribution of the stock (otherwise why did you sell a put on this particular stock) any adjustment changes that view.

I'm not trying to recover anything. That wouldn't make any sense if I'm trying to get a 0 Delta. I'm just trying to negate price fluctuations. All I want is the premiums for the shorts.

When I sell puts, I back them with cash so I can take the assignment. I just want to protect myself if TQQQ drops a huge amount after that while I'm selling the covered calls.

I want the MNQ short to 'adjust' my assignment cost basis so I can sell 30 Delta covered calls even if I own TQQQ way above the corresponding strike price.

It's to avoid the situation that someone else posted. He owns TQQQ at $70. TQQQ is around $25. Next weeks 30 Delta srike is around $26.5 If he had shorted MNQ, with rolling of course, when he got assigned, the $43.50 risk would be offset by the increased value of the MNQ short.

 

[cesfx]

Practitioners of the wheel are criminally stupid. But sure, add futures to the mix and post that shit here. I don’t post much any more but I’d love to railbird the ensuing debacle.

oh man, I miss your posts!

 

[ET180]

If you're going to short upside calls then add some leverage and shoot for neutrality. Buy 100 TQQQ -> short two 20D calls -> cover with wings on a strike touch at a net-credit -> rinse, repeat. You'll "own" synthetic flies at a large arb-credit (equivalent 10-wide natural fly for say, a credit of 30 cents) and it can be repeated indefinitely as you're trading house money. The fly at a credit means that you're available cash is greater than before you were carrying a position.

Conversely, do a D1 fly. Long TQQQ -> short two OTM calls -> long one further OTM call. Re-evaluate on strike touch.

Is this the trade that you are suggesting? Also, what is vol-line?

 

[destriero]

Sure, and that can be replicate in vol with a BWB. Generically I suggested 20D but I'd probably go with the 30/40 strikes. TQQQ touches 30 and you buy the 20-put which results in the 20/30/40 synthetic fly at little to no cost. Shares <25 out to Nov and I think you're safe in carrying the synthetic straddle with no upside prot, but you're only paying 18 cents for that call. When structured at 30-body? I would go long 100 TQQQ, short 2 Nov 30C and buy the 20/40 wings on a touch of $30 on shares.

Spot and vol are correlated. Meaning that as the market rises, vols drop. The vol-line generally refers to the vol at a specific strike and usually the prevailing ATM vol. Fixed delta vols will rise (sticky D) but global vols (strips) will drop. The skew is seen a predictor of forward vol, vertically (by strike in a tenor). Right now it's trivial edge (skew flat). IOW this environment is a boon for buy-writers.

Nov 30 combo is 8.48
Nov 25 combo is 7.40

So you're getting paid an additional 1.08 to carry those long deltas.

Synthetic combo (straddle) is trading 8.15 mkt ((strike - spot) + 2(30C prem)), but that's at the bid on the calls, not mid. The synthetic is trading near the Nov natural straddle.

So, you're not going to achieve a natural fly conversion at a credit on the 10-wide as the credit on the combo is 8.48, but you could run the 5-wide fly at a decent credit once you trigger the strangle buy on a touch of $30... or simply cover at a gain. The variables are time remaining, 30-strike vols, etc. I would estimate a 80% hit rate or better (gains to position on a strike touch).