I guess it would be a sigma move then. With an income strategy you profit when markets are flat or atleast within a standard deviation. Have any ideas?
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Protecting from a "Flash Crash"
- Thread starter daytrader85
- Start date
I guess it would be a sigma move then. With an income strategy you profit when markets are flat or atleast within a standard deviation. Have any ideas?
If you're involved in covered calls then the primary risk isn't losing your profits but losing a chunk of value of the stocks owned.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.
Hedging a Flash Crash can be done locally - hedging individual stocks... or globally - buying puts on major indexes or calls on underlyings that go up when everything is going down. You can reduce the cost the protection by spreading but that limits its effectiveness and is probably more suited for fluctuations than crashes.
The more protection you want, the more it costs. Like most insurance, it's a total waste of money until you need it.
PS An alternative might be to reduce your exposure by doing spreads rather than naked puts (which is the equivalent to the covered calls you mentioned).
LOL. Ten grand lost hurts just as much if lost intraday as lost over a longer time scale.Quote from sonoma:
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.
Quote from daytrader85:
I guess it would be a sigma move then. With an income strategy you profit when markets are flat or atleast within a standard deviation. Have any ideas?
I'm probably not being specific enough. Do you own only one stock that you overwrite each month and that you want to protect? A portfolio of stocks? An ETF? Are you looking to guarantee that any day prior to expiration your position would not suffer a loss? Are you okay with a loss on any one day, but not at expiration? Are you okay with a loss "at expiration" but not over a quarter, a year? During whatever timeframe you identify, are you okay with a loss of up to 2%, but no more? 5%, 10%? Or do you want to be protected up to 30%, but you're willing to take the risk of loss after the 30%?
You can see that there is not a simple answer, at least to the question I think you're asking. The more specific you can be, the more reliable the answer you'll get from the forum.
Quote from spindr0:
LOL. Ten grand lost hurts just as much if lost intraday as lost over a longer time scale.
Maybe, maybe not. If he's indifferent to a daily p/l, then May 6 is just a gnat on an elephant. By May 10 he was flat again, assuming he just held his nose.
You know that the more important the daily p/l, the more involved the hedge. I doubt someone who's simply overwriting Microsoft is going to be able to spend the time and energy necessary to hedge daily. And it's probably not even wise to do so.
Sure, if you assume that you're whole again after a Flash Crash then intraday loss is irrelevant. But what if it's 1987 and you've lost 20+ pct in one day? Losing 20+ pct in the GFC is just as painful.Quote from sonoma:
Maybe, maybe not. If he's indifferent to a daily p/l, then May 6 is just a gnat on an elephant. By May 10 he was flat again, assuming he just held his nose.
You know that the more important the daily p/l, the more involved the hedge. I doubt someone who's simply overwriting Microsoft is going to be able to spend the time and energy necessary to hedge daily. And it's probably not even wise to do so.
I don't know what hedging daily has to do with any of this. The OP indicated that he's doing covered calls and he referenced a "good monthly income".
And how did "overwriting" get into this? It's a way to add some possible extra income but it provides marginal downside protection and I don't recall the OP indicating anything other than covered writing.
Quote from spindr0:
Sure, if you assume that you're whole again after a Flash Crash then intraday loss is irrelevant. But what if it's 1987 and you've lost 20+ pct in one day? Losing 20+ pct in the GFC is just as painful.
I don't know what hedging daily has to do with any of this. The OP indicated that he's doing covered calls and he referenced a "good monthly income".
And how did "overwriting" get into this? It's a way to add some possible extra income but it provides marginal downside protection and I don't recall the OP indicating anything other than covered writing.
I think your advice to the OP will be of more use if he reflects on the questions I asked of him. It will force him to think more specifically about the type of loss he can not sustain. Most investors don't deliberate long enough on this issue. They just want to avoid losing money, at any time. That ain't possible.
Overwriting is simply shorting calls on existing equities. A holdover phrase from a different time in my life. Same thing as a "covered call."
Long VIX Calls, long otm puts on the indexes, whatever it is, it's going to eat into the premium from your sold calls. You just have to find a risk:reward you are comfortable with.
Quote from sonoma:
I'm probably not being specific enough. Do you own only one stock that you overwrite each month and that you want to protect? A portfolio of stocks? An ETF? Are you looking to guarantee that any day prior to expiration your position would not suffer a loss? Are you okay with a loss on any one day, but not at expiration? Are you okay with a loss "at expiration" but not over a quarter, a year? During whatever timeframe you identify, are you okay with a loss of up to 2%, but no more? 5%, 10%? Or do you want to be protected up to 30%, but you're willing to take the risk of loss after the 30%?
You can see that there is not a simple answer, at least to the question I think you're asking. The more specific you can be, the more reliable the answer you'll get from the forum.
I am actually long back month SPY calls and sell front month call spreads. I guess its ok to have one bad month, but I just don't want to lose all everything I have made if something like a black swan even occurs. It will be like selling naked strangles and being profitable for several months and suddenly large volatiilty hits and all your profits get eaten away.
I have no idea whether you're buying back month calls and selling front month spreads (a net long position) OR buying back month calls and selling front month calls against them (a calendar or diagonal). I assume the latter (which means we've mutated from covered calls to spreads).Quote from daytrader85:
I am actually long back month SPY calls and sell front month call spreads. I guess its ok to have one bad month, but I just don't want to lose all everything I have made if something like a black swan even occurs. It will be like selling naked strangles and being profitable for several months and suddenly large volatiilty hits and all your profits get eaten away.
Either way, as someone mentioned previously, that's the CODB. Positions have risk and sometimes sh*t happens. But most spreads have risk in no way similar to that of selling naked strangles where a gap/crash can take away much more than your profit.