How to hedge call side on Strangle?

[iprome]

When the loss hits a certain level: Risk increases from 1 to 3

1. Close
2. Roll 1 up to a more OTM options
3. Roll up to a more OTM options but sell extra and keep the same credit level

Robert, is the following 4th choice a viable way to hedge a short call?

4. Buy 100 shares when stock price cross up price X (X <= short call strike), and close these shares when stock price cross down X. Repeat.

The short put side can be hedged with short shares in a similar way.

 

[iprome]

When the loss hits a certain level: Risk increases from 1 to 3

1. Close
2. Roll 1 up to a more OTM options
3. Roll up to a more OTM options but sell extra and keep the same credit level

3 increases risk exposures, so I don't think it is a "hedge".

2 also increases risk exposures if the roll realizes a loss.

 

[ironchef]

I take on board the suggestive criticism, but purely for knowledge base I wonder how others would manage a naked call or the short call of strangle other than closing it outright.

One of the pros here (I think it was Maverick74) used to tell us newbies:

1. If the position goes against you, it means your opinion is wrong, first order of business is to reduce risk.

2. You could reduce by: getting out or manage your position.

3. To manage your position, think about reducing risk, many of the roll up and out could actually increase risk. So think about how to minimize the damage if delta, vega, gamma continue to go against you.

4. In that sense, the only reason you roll is not to avoid a loss but that the new position is one you would make anyway without the old. Take your example, short OTM put, your negative delta, gamma increase, so you need to add some delta and gamma if you think your opinion is still valid. Perhaps protect the tail .....

5. My humble suggestion is to total up your delta, gamma, vega and see if your current position is better or worse than before. If worse, think about minimizing negative delta, gamma and vega?

I am a newbie retail so I am not sure this is correct. Corrections are welcome.

 

[Robert Morse]

Robert, is the following 4th choice a viable way to hedge a short call?

You are asking me using the term "viable." I can't answer that as the end results are unknown. The reality is that in my opinion, I find that does not work well for me. My rules, that I would set for me with naked shorts, is to cover when a certain adverse event occurs and move on. I would preset that adverse event value before entering the trade.

 

[Overnight]

...

1. If the position goes against you, it means your opinion is wrong, first order of business is to reduce risk.
...

That is the worst advice ever in the whole trading universe. Trust me, I KNOW THIS.

If you enter a position, and it goes against you in a few moments, and you close it for a loss?

Keep repeating that pattern, and see where you wind up after a MONTH of trading in that mindset.

You will be bankrupt in a very short timeframe.

 

[Robert Morse]

That is the worst advice ever in the whole trading universe. Trust me, I KNOW THIS.

I don’t think any of us are talk about a small loss.

 

[TheBigShort]

If you enter a position, and it goes against you in a few moments, and you close it for a loss?

I am pretty sure that's not what he meant. C'mon dude. It's very reasonable to re-evaluate if what you expected to happen does not.

 

[Overnight]

I am pretty sure that's not what he meant. C'mon dude. It's very reasonable to re-evaluate if what you expected to happen does not.

Indeed, apologies to OMM and you, I see this is the options forum. I do fall a lot into the option trap, and keep thinking y'all are on about something other than options. Then I see it is the options forum.

I keep knee-jerk reacting to posts I see in the new post list on the main forum page, and have to remind myself to look at the context.

Options, ack! Sorry y'all. My bad.

 

[lotfyisis]

I agree with iprome approach. What I found to be viable for me is the following:

1. Determine the price level at which the intervention plan will kick in. This usually starts if the threatened short side approaches 35 to 40 delta. You do not want to wait till it is in the money, too late.

2. Buy call options ( if you are short call ) with a strike price just below your short strike. So, if you are short NFLX at 300, buy call at 299. The number of calls is equal to the number of your short position. You can buy more if you are bullish over all.

3. Finance the recently purchased call by selling ratio put spreads ( or BWB ) for credit. If the stock kept going up, you already have added more delta and gamma your position. If the stock reversed course and threatened your short put, do the process in reverse, i.e buy long puts in front of your short puts and finance it by selling call ratio spread or BWB for a credit.

I have successfully put this trade on very low volatility ETF (TLT) with excellent results. You will make more money on the adjustment than the original position. The key as usual is your position sizing as adjustment usually adds up significantly to your size which mean more leverage, you need to start small or at least be prepared.