You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Premium Sellers vs. Option Buyers
- Thread starter Squilly_D
- Start date
Red Duke I have done and occasionally do what you have suggested, however the problem in calling it a "hedge" (which I have) is exactly what both Mav and sle have said...you have just opened yourself to unbounded risk in the other direction. I occasionally do get long or short the cash if my overall deltas are uncomfortable....BUT I am quick to close out cash positions ..like this am..had a long ES contract and closed it. A better hedge of an overall short position in call options is simply take advantage of a day like today and buy some otm calls.. You can also sell a put either monthly or weekly but you still have to understand your risks. VIX today is no where close to what it was in 08 so that is what you want to watch like a hawk.
Quote from mokwit:
Or to put it another way, you have to ask what are you REALLY trading?
(another question is are you actually trading the same position with multiple correlated instruments that only seem to be different)
"you are more likely then not to not be successful if your strategy seeks out small winners" i.e you must risk a little to make a lot - you are looking for dramatically skewed risk:reward profiles.
I seek out high probability trades on 100% IVP (IV that is at a 52week high) and HV is contracting. Otherwise I use other strategies for different IVP levels.
You got that right, and if one was smart, you would go find the premium elsewhere and leave the broad based indices to low Vol strategies.Quote from Maverick:
the p&l symmetry of a premium seller is highly correlated to a broad based index
Yeap, with the appropriate strategies applied across ones portfolio.Quote from Maverick:
You SHOULD be making money in this environment.
I guess Iâm kidding myself, because Iâve primarily been short the market in overall delta (nothing outrageous) sense Iâve started option trading last November with periods of being long. It has been an intense ride!Quote from Maverick:
But don't kid yourself, youâre basically just long an index.
I do that on a daily bases. And sense I started trading with just a few thousand dollars, I either figured it out quick or go play fantasy football with the mainstream. Itâs a good thing tastytade teaches one not to follow the trend, and as long as one stays small across # of trades within the portfolio, diversified by different market asset classes* (commodity etfâs, currency etfâs, equities etfs and stock, bond etfs, etc.), different strategies, different expiration cycles, and above all, only trading the most highly liquid underlying's within the marketsâ¦One can sleep easy at night!Quote from Maverick:
The second this trend changes, you're going to start learning a lot about yourself.
*I don't do futures yet, but plan to in the future once I get a bigger capital base...by the way, can anyone suggest when it is a good time to incorporate futures relative to the amount of capital one has in their portfolio?
Maverick, I wanted to tell you I appreciate the comments. Itâs good to hear insight from other experienced traders! And that goes out to all the other commenter's. Thanks again
I disagree with Mav a little bit. In general, risk premium is overpriced (that's the nautre of the institutional business) and harvesting it is a positive expectation trade long term. However, the knock-out nature of the possible shocks makes it an unpleasant trade if done unhedged. So, you want to find a rich risk premium that you like to sell and find some cheaper (or cheap, if there is such a thing) risk premium that you put on as a hedge.
Quote from sle:
I disagree with Mav a little bit. In general, risk premium is overpriced (that's the nautre of the institutional business) and harvesting it is a positive expectation trade long term. However, the knock-out nature of the possible shocks makes it an unpleasant trade if done unhedged. So, you want to find a rich risk premium that you like to sell and find some cheaper (or cheap, if there is such a thing) risk premium that you put on as a hedge.
So you sell high implied volatility out of the money and hedge it with low at the money implied volatility?
Quote from just21:
So you sell high implied volatility out of the money and hedge it with low at the money implied volatility?
That can be a very dangerous trade.
To get the portfolio volatility you need you have to trade pretty large size and that's and you have to be that much more precise.
Lots of moving parts in selling skew.
The issue with buying otm options as a hedge is that if they are too far, they are not much of protection, and if they are like 25 points away on es, one needs to give up too much premium.
I do realize that if I short calls, and then buy futures as a hedge, and there is an abrupt sudden move down, I might loose a lot on a futures trade. That being said, liquidity on es is great, and getting out should not be a problem. The real danger is wispsowing back and forth.
Options vs futures ratio needs to be selected carefully, and I can not find anything else that will provide a better hedge (hedge is being used loosely as others pointed out) without giving up premium too much.
Any other ideas on short option hedging?
Thanks,
redduke
I do realize that if I short calls, and then buy futures as a hedge, and there is an abrupt sudden move down, I might loose a lot on a futures trade. That being said, liquidity on es is great, and getting out should not be a problem. The real danger is wispsowing back and forth.
Options vs futures ratio needs to be selected carefully, and I can not find anything else that will provide a better hedge (hedge is being used loosely as others pointed out) without giving up premium too much.
Any other ideas on short option hedging?
Thanks,
redduke
Quote from RedDuke:
The issue with buying otm options as a hedge is that if they are too far, they are not much of protection, and if they are like 25 points away on es, one needs to give up too much premium.
I do realize that if I short calls, and then buy futures as a hedge, and there is an abrupt sudden move down, I might loose a lot on a futures trade. That being said, liquidity on es is great, and getting out should not be a problem. The real danger is wispsowing back and forth.
Options vs futures ratio needs to be selected carefully, and I can not find anything else that will provide a better hedge (hedge is being used loosely as others pointed out) without giving up premium too much.
Any other ideas on short option hedging?
Thanks,
redduke
Duke, I assure you, whatever ideas you have, whatever thoughts on this are going through your head, whatever clever constructs you can imagine, I have tried them all over 16 years. You can take that for what it's worth or completely disregard it.
Here is your conflict. "When" one needs to hedge, it's never when the VIX is at 12 and the spoos are moving 6 handles a day, just as firemen are never needed at your house during a football game with a BBQ going and Beers in the cooler. Firemen come to your house when someone might die, when there is an emergency. "When" you need to hedge, the VIX will be at 40, spoos will have 60 handle ranges, markets will be gapping up and down in both directions and if you think you have seen whipsaw, wait till you have a leveraged position going in your face and you will truly understand what whipsaw is.
In a perfect world, you will hedge your position when the sun is out, birds are chirping and the market is moving nice and slowly towards your short calls and you hedge away and everything is peaches. The reality is, all hell will break loose, and the amount of money you are going to lose just to get a few nickels in short premium is going to make you seriously rethink your IQ and whether or not you should have drove a taxi for a living.
You want to know what the best hedge is? Just buy em back son. Nice and easy. Take the loss. Grab a beer. Go back to the drawing board. Let me put this another way. If your strategy is so poorly constructed that one losing trade wipes all your profits away, then you need to construct a new strategy. But the simple answer is, if your sell naked calls and the market is gunning for them, lift that offer on them and get flat.