Yes, and the "ratio" means you buy more OTM puts than you but OTM calls. Maybe buy 2 for every 1 you sell or something. You're buying them further out (cheaper) than the ones you sell, so you don't pay as much for each one. Having said that, this strategy is easier said than done. You'll mostly have a bunch of small losses.@cesfx et all: do you mean this? :
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Put Ratio Spread
A put ratio spread is a multi-leg, neutral strategy with undefined risk and limited profit potential. The strategy looks to take advantage of a drop in volatility, time decay, and little or no movement from the underlying asset.
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But isn't that just a crappo for the trashcan?
Hedging your portfolio against market down swings?
- Thread starter pravinbs
- Start date
But your above example clashes with this definition:
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Put Backspread Setup
A put backspread consists of selling-to-open (STO) one short put option in-the-money and buying-to-open (BTO) two long puts out-of-the-money below the short put option. The number of contracts must have a ratio where more long puts are purchased than short puts are sold.
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You said to sell OTM, but here it says to sell ITM....
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Hedge for example SPY;
with some SH or spxs spxu, or UPRO.
LOOKS like these last lines may not pay off much this week; but since we are ina bear market/bear rally\ so scale out of your spxs,SPXU hedge this week.
And do some self insurance/ skip the puts or sometimes skip SPY or SH, SDS;and sometimes splv or spyg > SPY...............................................................................................
EDIT; i seldom buy state law minimum liablilty on my auto because its so cheap;
comprehenseive tend$ to be overpriced on used auto.
But i bough some comp insurance this year/because used car market got so wild on UP side. I'm under insured on my guns + more guns, but chose that also. I did sell 2 of my guns thru a fed liscense dealer/ but planned on that.....
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Sorry,
I'm living in a derivatives bubble^^
To be clear, you want to sell something that everyone is buying when betting on downside or "hedging", which is the 25 delta put. You receive a premium and now you run to buy as many 5 delta (or 3 or 1 delta) puts as you possibly can while staying premium neutral (or pay a small debit)
Try buying these teenies on the bid because it makes a massive difference if you get 4 of them at 5 cents vs 5 of them for 4 cts.
Now the more advanced option traders might argue that you buy high skew (the teenies) and sell low skew (the 25 delta puts), which is true BUT teenies have so little vega that you have to calculate in premium terms.
I don't want to start with power laws and all that quant stuff that's where it's better to read Taleb if you want to dive in deeper.
A word of caution here: this is nuke protection, meaning it makes money during an outlier move. You cannot hedge a 5% down move with this or even worse, the market is meandering down and you don't do anything. The position is so far out of the money that it only kicks in during a VIX spike of 40% or more. Anything less, you don't lose or win anything.
OP was presenting hedging strategies. All of them are bad. I trade derivatives for a living and was presenting an alternative.
This has nothing to do with making money, because there is no edge in a hedge.
I don't care about your P/L as you shouldn't care about mine
Here's a put backspread variation shown in a video by an ET member.
THE BLACK SWAN HEDGE. I MADE A PROMISE, AND I'M KEEPING IT! - YouTube
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The title reads "Hedging your portfolio against market down swings?"
It has a question mark. Why?
So, what's the real challenge here? Is it:
- how to protect stocks in the portfolio in a bear market? Or
- how to protect the cash from inflation, ie. earning at least the inflation% to keep the "buying power" of the money?
It has a question mark. Why?
So, what's the real challenge here? Is it:
- how to protect stocks in the portfolio in a bear market? Or
- how to protect the cash from inflation, ie. earning at least the inflation% to keep the "buying power" of the money?
that's the issue. Retail hedging is always expressed as the desire to keep the upside intact but don't lose anything as soon as the market ticks down.
In reality, however, hedging is muting one or more risk factors in order to single in on the one that you think is mispriced. You do that to be able to trade more size with exposure to the risk factor you have edge in.
So what do you really want to hedge against? Want a hard stop for your portfolio? buy puts, sell calls. Capped downside but also capped upside. Want crash protection, buy downside convexity as cheaply as possible and finance the bleed with something that has carry