Protect Iron condors using the VIX

S

seotrader

Hello,

I want to protect my iron condors positions ( SPY,QQQQ) from a big price drop in 1 day ( example drop of more then 7%)

I want always to be protected , because I can never know when this catastrophic day will happen.

Looking for good ideas for protection:

I was thinking buying for example the
VIX 45 MAY10 CALL - the number of contract should be enough to offset big part of the loss in case of a huge drop in the market.

I will be happy to hear other opinions.

Thanks
 
Its been discussed at lenght already. The problem with Vix options is that they track the futures and its very unlikely the may future would be significantly impacted if the spot Vix moves by "only" 7%.

Cheap units on the actual underlying are probably a better way to go.
 
The easiest way to protect your position is to buy some way OTM puts on the actual underlying.

The main problem with VIX options is that they are priced off of the VIX futures and not the spot VIX so buying May VIX options may not do you much good if the markets selloff and the spot VIX goes to 80 or whatever, while the VIX futures (whichever month is used to price May options) rise only slightly.
 
Those puts that are far out of the money don't give me so much protection.

For example in a 1 day drop of 10% I will just be in the max loss of the Iron condor, so I will make money ( lose less) just if it continue to drop

And more closer out of the money are just too expensive

I want something that will multiply its value at least 5 times, in case of a drop of 10% in 1 day .

This can be kind of "cheap" protection for me.

Do you think that the next month OTM VIX options is fair enough to achieve that?
 
Consider OTM back month puts or OTM calenders on the underlying. They can be expensive, but you shouldn't just consider the initial cost. Because you can resell them and recoup some cost when you don't need them any more. Or, consider the total cost per day to own them not just the initial cost. And don't forget to figure in the change in the volatility with a 10% drop both on your IC and on the protection.
 
I’m currently facing same issue. I think that straight puts are too expensive, and if you go further OOM, you don't have enough protection.

Lets’ say I sold 10 Jan 550/540 put spreads for total credit of $900. I also have the call spread, and the total credit is about $2,000.

The options I might consider:
1. Buy 1 calendar slightly closer to money – for example, Mar/Jan 560 put calendar. One contract will cost about $1,400. If Jan put expires worthless, I can sell feb put for another $500, and have a good protection. But if RUT goes higher, this protection is not effective for the next month, and big portion of it will be lost. Too expensive.
2. Buy 2 Jan put spreads further OOM – 540/530. Cost: about $140. Protection: excellent if RUT goes below 530 (12%). But what if RUT goes “only” to 545? I can close the 10 contracts of 550/540 if RUT reaches 550, but how much will my protection be worth at this moment?

Any thoughts?
 
Quote from akivak:

I’m currently facing same issue. I think that straight puts are too expensive, and if you go further OOM, you don't have enough protection.

Lets’ say I sold 10 Jan 550/540 put spreads for total credit of $900. I also have the call spread, and the total credit is about $2,000.

The options I might consider:
1. Buy 1 calendar slightly closer to money – for example, Mar/Jan 560 put calendar. One contract will cost about $1,400. If Jan put expires worthless, I can sell feb put for another $500, and have a good protection. But if RUT goes higher, this protection is not effective for the next month, and big portion of it will be lost. Too expensive.
2. Buy 2 Jan put spreads further OOM – 540/530. Cost: about $140. Protection: excellent if RUT goes below 530 (12%). But what if RUT goes “only” to 545? I can close the 10 contracts of 550/540 if RUT reaches 550, but how much will my protection be worth at this moment?

Any thoughts?
More...

Hi Aviak

I just wonder

If you buy 2 MAY40 OTM CALL of VIX for 320$

In case of a big very big drop of more then 10% , you are suppose to make big money on this 320$

I have a problem to calculate how much exactly.

but if it will be up by 500% , its a good protection.
 
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