Hedging the wheel

[IronFist]

I only comprehended about a third of this thread but I enjoyed it.

 

[ondafringe]

I only comprehended about a third of this thread but I enjoyed it.

I understood less than you, and I enjoyed it, as well.

 

[Kevin Schmit]

Thanks Des

Regards your 25D normalised RR for SPX, I've set it to the 30 day term in LiveVol, but I'm getting different values to you, so I must be doing something differen]

He didn't mention 25D, but if you want to normalize the 25D RR, express it as a ratio instead of a difference. That is PutVol / CallVol* instead of (PutVol - CallVol) / ATMFVol. This won't be as well normed to tenor as Dest's metric (it's subject to a Lucas critique in that regard), but it won't be that far off either. In fact it is nearly linear in terminal skew-edge in BP (difference in RND minus null of LN-with-fat-left-tail) in the vicinity of+-25D. You'll have to come up with your own critical value -- maybe 2.1 instead of 1.8, since the metric is not the same and you want some leeway on that misspecification.

*BTW, that representation (PV / CV) is an exact quote from one of Dest's posts from April 2018. So if you had read all of Dest's posts and taken notes, you would already know this. And for another clue on trading skew note that 95% of the mentions of the term LVLD on ET are either in Dest's posts of in posts that quote him.

 

[Cbos]

The option wheel strategy is a very common simple strategy.

I sell cash secured puts, one week out, at around a 30 delta and collect the premium. If it expires worthless, great. If I get assigned, then I'd like to 'hedge' that position by getting into a high leverage device to balance my positive delta with an 'equal' negative delta. Since my goal is to collect premium, I want to be overall delta zero.

Once 'pegged' at my assignment, I sell week out covered calls against it until it gets called away. Then I go back to the puts.

When I'm pegged, I'm subject to down side risk that I'd like to offset with a hedge. This would reduce my risk when selling the calls. If the market slides while I'm pegged and I sell a covered call below my basis, the difference can really add up fast.

Hi, why not exchange your stock for a DITM option to reduce downside risk and increase leverage?

 

[Cbos]

Hi, why not exchange your stock for DITM long position to limit downside risk and increase leverage? Turn into a PMCC.