Protecting from a "Flash Crash"

[daytrader85]

Let's say you have a good income earning strategy using options (i.e. covered call strategy). You have a good adjustment strategy and you are yielding good income monthly.

But, something like a the Flash Crash or a "black swan event" as some like to call it occurs and the market falls real hard. They money that you have made in the past months could get wiped out. I was thinking of way of hedging my risks of something like this happening to protect my profits or to lessen my losses.

Does anyone have any ideas? I was thinking of buying long term VIX calls or call spreads.

Thanks.

 

[sonoma]

Quote from daytrader85:

Let's say you have a good income earning strategy using options (i.e. covered call strategy). You have a good adjustment strategy and you are yielding good income monthly.

But, something like a the Flash Crash or a "black swan event" as some like to call it occurs and the market falls real hard. They money that you have made in the past months could get wiped out. I was thinking of way of hedging my risks of something like this happening to protect my profits or to lessen my losses.

Does anyone have any ideas? I was thinking of buying long term VIX calls or call spreads.

Thanks.

Do you mean that you only want to hedge a large sigma move?

 

[timbo]

CODB. As for protection, have enough cash to go net long.

 

[daytrader85]

Quote from sonoma:

Do you mean that you only want to hedge a large sigma move?

What do you mean by sigma move?

 

[osho67]

Quote from timbo:

CODB. As for protection, have enough cash to go net long.

How much is enough. Particularly with IB as IB will not give time to deposit cash. How much ? This question is very important to me. In fear I could be leaving lot more cash with IB instead of earning more premium. Thanks .

 

[trade2live]

I asked myself the same question. btw what exactly has been done to prevent another flash crash ? I understand some measures have been taken such as the individual stock circuit breakers but I would say that another flash crash or similar event is a near certainty.

I am looking into hedging partly with some long term puts on the naz and S&P and partly with short sales in different markets when the selloff is under way. But probably I will not be long anyway when it happens so will have not much to hedge.

 

[sonoma]

Quote from daytrader85:

What do you mean by sigma move?

Standard deviation.

Lots of folks here hedge day-in and day-out, so the technical answer to your query isn't so hard. Importantly, they'll want to know what you're trying to accomplish. For instance, are you looking to be protected intraday? The "flash crash" measured on an intraday scale was huge. Double-digit sigma. But viewed over a longer time scale, the decline was not so dramatic, so maybe a different type of hedge would be a better choice. Also tell us whether you're trying to hedge systemic risk or individual equity risk. That will help others point you in the right direction.

 

[psytrade]

Was anyone able to actually sell their puts during the flash crash? I haven't heard anyone suggest they were or weren't able to sell their puts. Would be nice to hear.

My long bond calls rallied huge, and then lost about 50% of their up move the next day, but I wasn't selling at the time.

Maybe a risk aversion overlay might be advisable - small portion of the portfolio devoted to calls in long govt bonds, puts on high yielding bonds, calls on risk averse currency pairs (yen, usd) might be able to hedge risk over longer periods. Very hard to hedge intraday day risk without spending a lot of money and time on the trading of the risk averse side. I would be more tactical with the hedge though, be more agressive with it when volatility is lower than whats been since the previous months.

 

[sle]

Quote from psytrade:

Was anyone able to actually sell their puts during the flash crash? I haven't heard anyone suggest they were or weren't able to sell their puts. Would be nice to hear.

My long bond calls rallied huge, and then lost about 50% of their up move the next day, but I wasn't selling at the time.

Why didn't you just cover delta?

 

[No.Heat]

You guys are looking at this from the wrong angles.

The idea is to have readily available cash in the trading accounts not to protect yourself from a flash crash but to buy those events when they occur.