You are correct, my positons are different so please disregard. I like the idea in general with risk protection from both the premium & call.
SPX Credit Spread Hedging
- Thread starter slayer3600
- Start date
You are correct, my positons are different so please disregard. I like the idea in general with risk protection from both the premium & call.
No reason to disregard, it's just different.
I would be interested to see how yours performs. Maybe start a thread in Journals if you want to spend the effort.
I indeed had an SPX MAR11 1180/1170 bull put spread entered in January for 9% credit. VIX did not get above 40 in March and the March 16th dip did not violate basic spread exit rules (bail at 20% loss). The spread short leg expired worthless and I kept full premium.
Unless you were one of those folks that keep rolling up your profitable spread for more premium, March should not have hurt. IMO, I wouldn't consider what happened in March a black swan event.
I haven't gone there yet. Though I realize nothing in the market place is impossibe, long term historical market performance displays skewness such that extreme tail events are more likely to the downside than to the upside.
I'd actually be curious if there really is an event that blasts through an SPX bear call spread put on 45 - 60 days in advance with short strike of roughly .09 - .12 delta AND netting at least a 3% profit.
you get killed on the downside but just wounded on the upside. Its actually easier to roll up spreads...esp 5pt wide spreads on the bear call side...often for a credit. What I do (because your right the steady uphill grind is much more frequent) is add a smaller debt spread ahead of it....so it might look like +2 1340 -7 1350 +5 1360(calls)...with the intention of rolling 55-60 if necessary to keep the loss small or perhaps pocket a profit. This takes luck in setting up given its the SPX. For me unbalanced flys are nice on the call side.
Even worse, people do not realize that if VIX moves higher in a few days but the VIX futures expire in 30 days, the traders are looking at future value of VIX at expiration (it is a future after all) and I have seen the expectation of a move back lower in VIX after the initial spike which has kept the VIX futures down are much lower than where the current spot VIX is.
So imagine the market crashes and your spread implodes as you were somewhat close to your short strike and your VIX options only move a little. Basically you used a sheet to catch an elephant falling out of the window.
I am not saying your idea is bad, just that there are so many little quirks with the VIX options and futures it makes it so hard to figure out quantity of options (buying them in sufficient size could eat into credit) or strike. I have heard many who thought that OTM cheap VIX options will hedge in a black swan event but many of those people told me how those options barely budged since the expectation was at expiration the spike in VIX was going to snap back or come back lower.
So be careful as the uniqueness of the VIXX options/VIX futures makes it require more diligence nad research to provide small insurance in worst case scenerio. But to be honest, a lot of spreaders get wiped out on market surges higher (VIX calls will not help) or normal selling off that may cause VIX to only move marginally.
It is a tough thing to figure out and even tougher to make work. Worth a shot though.
Okay just so you can see the thinkback results of the idea.
Oct 08 SPX spread with no VIX 40 hedge, no decent exit points, maximum loss:
Oct 08 SPX spread with VIX 40 hedge, three survival exit points, with the best one netting a $400.00 loss, the two other points net a $900.00 loss which would suck but is survivable and certainly better than the full $2800.00 loss or rolling into Novemeber for even bigger losses:
NOV 08 SPX spread with no VIX 40 hedge, no decent exit points, again with maximum loss:
NOV 08 SPX spread with VIX 40 hedge, several survival exit points, with the best one netting a $2.50 gain:
Oct 08 SPX spread with no VIX 40 hedge, no decent exit points, maximum loss:
Oct 08 SPX spread with VIX 40 hedge, three survival exit points, with the best one netting a $400.00 loss, the two other points net a $900.00 loss which would suck but is survivable and certainly better than the full $2800.00 loss or rolling into Novemeber for even bigger losses:
NOV 08 SPX spread with no VIX 40 hedge, no decent exit points, again with maximum loss:
NOV 08 SPX spread with VIX 40 hedge, several survival exit points, with the best one netting a $2.50 gain: