Your position has become a bit more complicated than simple overwriting, but let's take a look at it. There are still a lot of missing pieces of information, but here's an example of what you might consider. First, recognize that you've already mitigated catastrophe to some degree by owning the long call instead of the underlying, as long as you're deep and not leveraged. Say you are long the deferred mo (?6 mo) calls at 90d and short front month 2pt call verts at 35d. Maybe your ratio is at 1:3 or so. Now look at buying the same strike deferred month put as the call. Maybe 1:3. With the type of correction you've mentioned, your short verticals go to nothing. Your long call loses from delta, but the gains on vega provide a buffer. Your long puts benefit from both delta and vega gains. You're going to have to make some decisions after the bottom drops out, so get ready for some trading, but hey, that's where the fun is.
Protecting from a "Flash Crash"
- Thread starter daytrader85
- Start date
Your position has become a bit more complicated than simple overwriting, but let's take a look at it. There are still a lot of missing pieces of information, but here's an example of what you might consider. First, recognize that you've already mitigated catastrophe to some degree by owning the long call instead of the underlying, as long as you're deep and not leveraged. Say you are long the deferred mo (?6 mo) calls at 90d and short front month 2pt call verts at 35d. Maybe your ratio is at 1:3 or so. Now look at buying the same strike deferred month put as the call. Maybe 1:3. With the type of correction you've mentioned, your short verticals go to nothing. Your long call loses from delta, but the gains on vega provide a buffer. Your long puts benefit from both delta and vega gains. You're going to have to make some decisions after the bottom drops out, so get ready for some trading, but hey, that's where the fun is.
What about a "Flash Blast"? My term. What will you do to protect against that? Here's a previous post from Rearden Metal.
Rearden Metal
Registered: Jan 2003
Posts: 6077
04-18-05 08:11 PM
January 3rd, 2001.
A day that will live in infamy.
Market was acting weak, and I was short heavily in all my accounts. Suddenly the fed cuts interest rates by half a point. WHAT THE FUCK? I let out a loud blood curdling shriek. There wasn't even a fed meeting that day, and this was the first rate cut of the cycle. Spooz instantly pop 50 handles. Instantly I find myself down 2 1/2 mil. Yes, $2,500,000.
I instinctively cover & reverse, ending the day down 'only' 1 1/2 mil.
Of course you don't believe me. I wouldn't believe me either, but it happened.
Rearden Metal
Registered: Jan 2003
Posts: 6077
04-18-05 08:11 PM
January 3rd, 2001.
A day that will live in infamy.
Market was acting weak, and I was short heavily in all my accounts. Suddenly the fed cuts interest rates by half a point. WHAT THE FUCK? I let out a loud blood curdling shriek. There wasn't even a fed meeting that day, and this was the first rate cut of the cycle. Spooz instantly pop 50 handles. Instantly I find myself down 2 1/2 mil. Yes, $2,500,000.
I instinctively cover & reverse, ending the day down 'only' 1 1/2 mil.
Of course you don't believe me. I wouldn't believe me either, but it happened.