spreads question

misterkel

misterkel

I've been trading bull put spreads lately. Doing well enough, but got a beatdown today.
Trading large caps after pullbacks, mainly.
Question - Does it make sense to do a ratio trade on spreads? I like buy 5 bull put spreads, and one bear put spread (at a strike above the bull spreads). This will lower reward, of course, but will it decrease risk more, offering a more favorable R/R? Does the strategy make sense as a downside hedge?
 
With Vix at ≈10, you're going to find selling puts on quiet bluechips a tough row to hoe. You're risking dollars to make pennies. The premium just isn't there. And there's no magic spread that can change the underlying economics.
 
truetype said:
With Vix at ≈10, you're going to find selling puts on quiet bluechips a tough row to hoe. You're risking dollars to make pennies. The premium just isn't there. And there's no magic spread that can change the underlying economics.
More...
There's actually a lot of volatility right now in individual stocks...markets look very out of step with each other right now in the options chains.
 
There's definitely some large caps with decent vol - nvda - 28%
I like NOC and LMT - military contractors never lose money, do they?
Anyway - I was thinking about this protective put strategy yesterday and BAM - the market dropped pretty good today. Vomited up the week's profits. If I'd just held tight, though, I would have been okay. I jumped out of several positions right at the bottom!
I like large caps because S/R is usually pretty easy to establish.

I think I'll start using protective puts on half my trades to feel the results, but I am wondering if anyone had done so. I know ratio trades are considered to be conservative if set up properly.
 
You could use put debit spreads on indexes that offer high correlation (SPX / SPY / QQQ) to whatever large caps you're trading. If you put these slightly further OTM relative to your positions, but with a similar sensitivity to a market wide move (i.e. if your positions are 0.5% OTM short and 1.5% OTM long; on indexes go 1% OTM long and 2% OTM short), you get pretty cheap protection. Obviously doesn't help you if news drops on one stock you're holding, but can protect you from those market-wide news events.

The only problem with this is it can create a false sense of security, and as soon as your hedge positions come into play, you need to flatten out, lest the recovery leave your positions behind.

That way, you get the very cheap index options as a hedge, while collecting the premium where it's available.

You can fudge the how much of your positions you want to protect, and from what level to fit this best to your risk / reward profile.
 
beerntrading said:
You could use put debit spreads on indexes that offer high correlation (SPX / SPY / QQQ) to whatever large caps you're trading. If you put these slightly further OTM relative to your positions, but with a similar sensitivity to a market wide move (i.e. if your positions are 0.5% OTM short and 1.5% OTM long; on indexes go 1% OTM long and 2% OTM short), you get pretty cheap protection. Obviously doesn't help you if news drops on one stock you're holding, but can protect you from those market-wide news events.

The only problem with this is it can create a false sense of security, and as soon as your hedge positions come into play, you need to flatten out, lest the recovery leave your positions behind.

That way, you get the very cheap index options as a hedge, while collecting the premium where it's available.

You can fudge the how much of your positions you want to protect, and from what level to fit this best to your risk / reward profile.
More...

that could work, since I have about 8-10 positions open - for the very reason of diversification from a single ticker crashing. So - a general index hedge (probably SPX would work for almost anything large-cappish. I never really looked at it that way before.
Thanks. I'll try that.
 
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