Hedging the wheel

[BKR88]

Perfect example of someone that comments without understanding what we're talking about.
Who said anything about selling TQQQ before selling the TQQQ covered call in Way 2?

I know exactly what you're trying to do. You want TQQQ movement removed and collect the premium from the short call.
I suggested selling TQQQ before the covered call. You suggested shorting MNQ. BOTH METHODS WILL GIVE THE SAME RESULT. Do the calculations or look at my examples of TQQQ at 20 or 30. Same results.

 

[markthepadrone]

Right, so here's the problem: you don't get to have that. If there was an underlying that never moved or only moved up, nobody would pay you for risk on it. You're getting paid for selling insurance against the downside - which means there is a downside. Which YOU get hurt by when it happens, with a long-term expectancy of $0 profit (as for any trade without specific alpha or advantageous mispricing.)

But take the other half: the CC after you're assigned. Say you've paid $100k for 1000 shares... you'd really be OK with that stock sitting there week after week, not gaining anything at all for you while inflation is taking money out of your pocket, and doing (again) zero-expectancy trades while you do? Give that some thought.

(Note that vol - and so premium - on a waterlogged stock like that is damn near nothing. But even if you could sell it at $1/lot/week, that's a return of ~5%/year on your exposure. Which presumes a steady/rising market, in which B&H on S&P 500 traditionally returns something like 9%. What was the point, again?...)

Right, so here's the problem: you don't get to have that. If there was an underlying that never moved or only moved up, nobody would pay you for risk on it. You're getting paid for selling insurance against the downside - which means there is a downside. Which YOU get hurt by when it happens, with a long-term expectancy of $0 profit (as for any trade without specific alpha or advantageous mispricing.)
> I agree. That's why I'm looking at ways to limit that downside. As for people paying me to take the risk, I regularly get .50 to .80 per share for one week out.

But take the other half: the CC after you're assigned. Say you've paid $100k for 1000 shares... you'd really be OK with that stock sitting there week after week, not gaining anything at all for you while inflation is taking money out of your pocket, and doing (again) zero-expectancy trades while you do? Give that some thought.
> Why would it be sitting there week after week? I'd be selling CC against it with the MNQ short holding up its value.

(Note that vol - and so premium - on a waterlogged stock like that is damn near nothing. But even if you could sell it at $1/lot/week, that's a return of ~5%/year on your exposure. Which presumes a steady/rising market, in which B&H on S&P 500 traditionally returns something like 9%. What was the point, again?...)
> Have you looked at the premiums on TQQQ? I regularly get .50 to .80 per share for one week out. As of Friday, my return is 2.68% per week since I started doing this months ago.

 

[BlueWaterSailor]

> I agree. That's why I'm looking at ways to limit that downside.

No way to do it without taking on additional risk. In this case - as everyone has been pointing out - the risk of going naked on an adverse move (the underlying is locked against your hedge but still had a fixed cost at assignment time that you will need to give up at a much lower cost if it's exercised) and built-in losses and risks (haircut, locked-in loss from buying below/after assignment, cutting off your upside on rallies.) So you're paying for constant friction, losing a chunk here and there on the regular, and have no upside (which would at least give you a chance to recover some of the downside.) I.e., a bad trade idea overall.

> Why would it be sitting there week after week? I'd be selling CC against it.

Not your P&L (which, as I've pointed out, wouldn't even come near the benchmark) - your underlying. The stuff you've paid a good chunk of money for... money that you wanted a return on, remember?

> Have you looked at the premiums on TQQQ? I regularly get .80 per share for one week out.

There is a very good reason for that - especially in this market. Look at some of the drops on the chart, see if you can figure out what that would do to the premium (at 3x) and to your shares. Maybe see if you can get a history on 30D option prices during one of those. Or glance at a chart of realized/historical vol in TQQQ recently.

 

[cesfx]

Have you been reading some of these comments?
They have nothing to do with what we're talking about.

You're one of the only people here making sense.

Keep in mind that you are the option beginner... and a very stubborn too.
"They" are experienced professionals.
You just don't understand what they are talking about, seriously. Lost in translation.

They are so ahead of you that if they look behind they see your option trading future!

Right, so here's the problem: you don't get to have that. If there was an underlying that never moved or only moved up, nobody would pay you for risk on it. You're getting paid for selling insurance against the downside - which means there is a downside. Which YOU get hurt by when it happens, with a long-term expectancy of $0 profit (as for any trade without specific alpha or advantageous mispricing.)
> I agree. That's why I'm looking at ways to limit that downside.

But take the other half: the CC after you're assigned. Say you've paid $100k for 1000 shares... you'd really be OK with that stock sitting there week after week, not gaining anything at all for you while inflation is taking money out of your pocket, and doing (again) zero-expectancy trades while you do? Give that some thought.
> Why would it be sitting there week after week? I'd be selling CC against it.

(Note that vol - and so premium - on a waterlogged stock like that is damn near nothing. But even if you could sell it at $1/lot/week, that's a return of ~5%/year on your exposure. Which presumes a steady/rising market, in which B&H on S&P 500 traditionally returns something like 9%. What was the point, again?...)
> Have you looked at the premiums on TQQQ? I regularly get .50 to .80 per share for one week out.

If you limit the downside 1:1, you are naked the upside when selling covered call. If you don't limit the downside, you are naked on the downside.
Selling cash secured puts to begin with and covered call, collar or whatever you build adjusting... pays peanuts, compared to the risk you are taking either way.

 

[markthepadrone]

No way to do it without taking on additional risk. In this case - as everyone has been pointing out - the risk of going naked on an adverse move (the underlying is locked against your hedge but still had a fixed cost at assignment time that you will need to give up at a much lower cost if it's exercised) and built-in losses and risks (haircut, locked-in loss from buying below/after assignment, cutting off your upside on rallies.) So you're paying for constant friction, losing a chunk here and there on the regular, and have no upside (which would at least give you a chance to recover some of the downside.) I.e., a bad trade idea overall.

Not your P&L (which, as I've pointed out, wouldn't even come near the benchmark) - your underlying. The stuff you've paid a good chunk of money for... money that you wanted a return on, remember?

There is a very good reason for that - especially in this market. Look at some of the drops on the chart, see if you can figure out what that would do to the premium (at 3x) and to your shares. Maybe see if you can get a history on 30D option prices during one of those. Or glance at a chart of realized/historical vol in TQQQ recently.

No way to do it without taking on additional risk. In this case - as everyone has been pointing out - the risk of going naked on an adverse move (the underlying is locked against your hedge but still had a fixed cost at assignment time that you will need to give up at a much lower cost if it's exercised) and built-in losses and risks (haircut, locked-in loss from buying below/after assignment, cutting off your upside on rallies.) So you're paying for constant friction, losing a chunk here and there on the regular, and have no upside (which would at least give you a chance to recover some of the downside.) I.e., a bad trade idea overall.
> If I'm assigned TQQQ at 100 and I short MNQ to bring it to 0D ish at say 97. My "hair cut" is a maximum of 3. Correct? No mater how low TQQQ goes, the hair cut deosn't change. Correct?

Not your P&L (which, as I've pointed out, wouldn't even come near the benchmark) - your underlying. The stuff you've paid a good chunk of money for... money that you wanted a return on, remember?
> My P&L has beaten my hair cuts so far. . .

There is a very good reason for that - especially in this market. Look at some of the drops on the chart, see if you can figure out what that would do to the premium (at 3x) and to your shares. Maybe see if you can get a history on 30D option prices during one of those. Or glance at a chart of realized/historical vol in TQQQ recently.
> Hence, the MNQ short.

 

[destriero]

It must be a hard life for you thinking that everything you're not capable of is impossible.

The guy you're quoting spent years on a ibank desk and his LNW would make you sht yourself. The fact that you're denigrating the guy while stating you're going to make 100% is not funny, it's pathetic.

 

[markthepadrone]

Keep in mind that you are the option beginner... and a very stubborn too.
"They" are experienced professionals.
You just don't understand what they are talking about, seriously. Lost in translation.

They are so ahead of you that if they look behind they see your option trading future!



If you limit the downside 1:1, you are naked the upside when selling covered call. If you don't limit the downside, you are naked on the downside.
Selling cash secured puts to begin with and covered call, collar or whatever you build adjusting... pays peanuts, compared to the risk you are taking either way.

Keep in mind that you are the option beginner... and a very stubborn too.
"They" are experienced professionals.
You just don't understand what they are talking about, seriously. Lost in translation.
They are so ahead of you that if they look behind they see your option trading future!
> Thanks for being so specific. Now I really understand.
> I use the Greeks that are provided by the market makers, so yes, I know who the professionals are.

If you limit the downside 1:1, you are naked the upside when selling covered call. If you don't limit the downside, you are naked on the downside.
> Correct. Why would I care if I'm naked on the up side? If I sell a CC with a strike at my cost basis and the market goes to the moon, why would it mater if I closed the MNQ short in time?

Selling cash secured puts to begin with and covered call, collar or whatever you build adjusting... pays peanuts, compared to the risk you are taking either way.
> Just not true. I might be a high risk, but it pays well. Think about it this way. If I sell a put and get assigned at 100 with TQQQ at 95, my realized risk is 5. Yes, it has the potential of being much more, but it isn't. The market can either go up again or down. If it goes down and my MNQ short picks up the slack at 92, my loss will stay locked at 8 no matter how low it goes. I can then sell CC based on a basis of 92 over and over again. Yes, if the market continues to drop, the premiums will go lower but over time those premiums will eat away at my basis so I can sell strikes less than 92 and still make money.

 

[BlueWaterSailor]

> If I'm assigned TQQQ at 100 and I short MNQ to bring it to 0D ish at say 97.

How will you do that without a magical price predictor? Remember, what you're selling is protection against downside moves, especially sharp ones - which means that's what you're exposed to. The real scenario is you waking up to a $10 drop, not one to your strike (that's not downside - that's you getting out at scratch.)

My "hair cut" is a maximum of 3. Correct? No mater how low TQQQ goes, the hair cut deosn't change. Correct?

No, the haircut is all the transaction fees you're paying for /MNQ, B/A spreads (which go to hell in a handbasket when the VRP goes sky-high), lifting the offer/hitting the bid when you need to get in/out right now, and so on. That's in addition to the losses you lock in by being unable to hedge instantly and at the perfect moment.

As some people have already pointed out, you'd be better off just taking the loss and getting out when this trade goes against you. Which comes back to the original premise: hedging in this situation doesn't make any sense.

> My P&L has beaten my hair cuts so far. . .

Like the guy who jumped off the Empire State building said when passing the 10th floor, "I'm doing just fine so far!" Monte Carlo analysis - Quantopia is pretty handy for that kind of thing - can be a wake-up call. Or just trading it long enough.

There are really two questions here: 1) "is wheeling profitable?" (it can be in the right market and with experience), and 2) "is this MNQ hedge a good idea?" (where the right answer ranges from "no" to "FUCK NO.") You need to figure out which one you're focused on.

 

[markthepadrone]

The guy you're quoting spent years on a ibank desk and his LNW would make you sht yourself. The fact that you're denigrating the guy while stating you're going to make 100% is not funny, it's pathetic.

With no disrespect to him, there is a giant difference between skimming flow and trading for yourself.

 

[markthepadrone]

How will you do that without a magical price predictor? Remember, what you're selling is protection against downside moves, especially sharp ones - which means that's what you're exposed to. The real scenario is you waking up to a $10 drop, not one to your strike (that's not downside - that's you getting out at scratch.)

No, the haircut is all the transaction fees you're paying for /MNQ, B/A spreads (which go to hell in a handbasket when the VRP goes sky-high), lifting the offer/hitting the bid when you need to get in/out right now, and so on. That's in addition to the losses you lock in by being unable to hedge instantly and at the perfect moment.

As some people have already pointed out, you'd be better off just taking the loss and getting out when this trade goes against you. Which comes back to the original premise: hedging in this situation doesn't make any sense.

Like the guy who jumped off the Empire State building said when passing the 10th floor, "I'm doing just fine so far!" Monte Carlo analysis - Quantopia is pretty handy for that kind of thing - can be a wake-up call. Or just trading it long enough.

There are really two questions here: 1) "is wheeling profitable?" (it can be in the right market and with experience), and 2) "is this MNQ hedge a good idea?" (where the right answer ranges from "no" to "FUCK NO.") You need to figure out which one you're focused on.

How will you do that without a magical price predictor? Remember, what you're selling is protection against downside moves, especially sharp ones - which means that's what you're exposed to. The real scenario is you waking up to a $10 drop, not one to your strike (that's not downside - that's you getting out at scratch.)
> I agree. This is all based on how efficiently I can get the short in place.

No, the haircut is all the transaction fees you're paying for /MNQ, B/A spreads (which go to hell in a handbasket when the VRP goes sky-high), lifting the offer/hitting the bid when you need to get in/out right now, and so on. That's in addition to the losses you lock in by being unable to hedge instantly and at the perfect moment.
> I agree. There will be a good bit of friction and loss.

As some people have already pointed out, you'd be better off just taking the loss and getting out when this trade goes against you. Which comes back to the original premise: hedging in this situation doesn't make any sense.
> I used to do this but found that given that I'm losing because I'm in a falling market, I can sell higher strike on the CC because the market is falling.

Like the guy who jumped off the Empire State building said when passing the 10th floor, "I'm doing just fine so far!" Monte Carlo analysis - Quantopia is pretty handy for that kind of thing - can be a wake-up call. Or just trading it long enough.
> I do trust MC analysis. I just don't think basing my decisions on a worst case series of events is practicable.

There are really two questions here: 1) "is wheeling profitable?" (it can be in the right market and with experience), and 2) "is this MNQ hedge a good idea?" (where the right answer ranges from "no" to "FUCK NO.") You need to figure out which one you're focused on.
> Fair enough. I don't agree but I see your point.