How to hedge credit spread option strategy?

I use debit spreads as hedges to my core credit spread positions. I use about 35-40% of my credits to purchase the debit spreads. And then use stops on the credit spreads to limit losses, and close the credit spreads when they're no longer hedging anything.
 
If you wish to mirror-hedge a credit option position, you will find that any of 8,762 different possibilities to do so will all have the characteristic that the position-delta of the hedge has the opposite sign of the position/portfolio you seek to hedge. It's that simple.

SO! Google "Youtube delta neutral" and have at it.

If you write multiple expiries (recommended), then you'll next want to keep an eye on matching theta-decay by vintages.....

(I mean, does it get any better than this?)
 
ironchef said:
[[tommcginnis said:
If you write multiple expiries (recommended), then you'll next want to keep an eye on matching theta-decay by vintages.....]]

Can you explain?

Thanks.
More...

Having a zero portfolio delta is a fine idea, but it does not portend well to equivalent movement between different vintages of options.
** You can get a zero by having a single vintage with slightly less short options than long options, on one side of the market (e.g., 5 puts below the market, and 6 puts one strike lower)
** You can get a zero by having one expiry with an equal balance of puts on one side and calls on the other.
** You can have a zero by having a one expiry by positive delta, and another expiry be negative delta...

...and each one of those may produce a *very* different reaction to the passage of time. Your cure? Recognize how fast each one will go away -- how fast each one may have its delta (its *gamma*) move violently -- and how that may be desirable to offset. The vega impact is highly impacted by the passage of time; the gamma impact is highly impacted by the passage of time -- so if [market movement] risk and [market volatility] risk are both impacted by time, keep a ready eye on the portfolio thetas (and the constituent position thetas).

95% of what I currently do is in SPX options. Every night, I print out a ±1% risk graph (by ¼% move) representing an overnight passage of time, using the Black Scholes Merton PDE. I have a thicker graphing for the portfolio-wide numbers, and thinner lines for the constituent expiry(s). It is very helpful to illustrate what I can expect from any given movement overnight, and very much focuses where I need to be most attentive, before I even bring the computer up. Sweet, that. (I'd throw it in here, but I've got a bunch of calendars on, and it's played havok with what are usually self-explanatory tracings....)
 
tommcginnis said:
Having a zero portfolio delta is a fine idea, but it does not portend well to equivalent movement between different vintages of options.
** You can get a zero by having a single vintage with slightly less short options than long options, on one side of the market (e.g., 5 puts below the market, and 6 puts one strike lower)
** You can get a zero by having one expiry with an equal balance of puts on one side and calls on the other.
** You can have a zero by having a one expiry by positive delta, and another expiry be negative delta...

...and each one of those may produce a *very* different reaction to the passage of time. Your cure? Recognize how fast each one will go away -- how fast each one may have its delta (its *gamma*) move violently -- and how that may be desirable to offset. The vega impact is highly impacted by the passage of time; the gamma impact is highly impacted by the passage of time -- so if [market movement] risk and [market volatility] risk are both impacted by time, keep a ready eye on the portfolio thetas (and the constituent position thetas).

95% of what I currently do is in SPX options. Every night, I print out a ±1% risk graph (by ¼% move) representing an overnight passage of time, using the Black Scholes Merton PDE. I have a thicker graphing for the portfolio-wide numbers, and thinner lines for the constituent expiry(s). It is very helpful to illustrate what I can expect from any given movement overnight, and very much focuses where I need to be most attentive, before I even bring the computer up. Sweet, that. (I'd throw it in here, but I've got a bunch of calendars on, and it's played havok with what are usually self-explanatory tracings....)
More...
Wow, that is a lot of work everyday/night. You work hard for your money! I have to study it carefully.

Me, I am not smart enough to do what you are doing. I am still at the stage where I gamble on directions.

Thank you for your coaching.
 
I do have another related question for tommcginnis and beerntrading:

A credit spread is sort of a hedge against a bullish bet, so wouldn't a hedge of the spread a hedge on hedge? If you are so unsure, why do the spread?

Thank you.
 
Ironchef I recommend that you read the book by Larry McMillan ( ch-10 ) it talks about the dangers on directional bias. ( as we previously discussed ).
 
wajoonline said:
Ironchef I recommend that you read the book by Larry McMillan ( ch-10 )

it talks about the dangers on directional bias. ( as we previously discussed )
More...

There's inherent dangers (and likewise rewards) in every way of thinking, or strategy,

It's all about how you personally can interpret it, and apply it, in the real world daily trading environment, o_O

Everything else is just noise and conversation -- as Gordon Gekko would say,
 
You must log in or register to reply here.
Back
Top