SPX Credit Spread Trader

[rdemyan]

Interesting point about the black swan. But I can forsee events which may not clearly be a "black swan" event. The London bombing last July comes to mind. The futures were down stongly and if I believe the market opened sharply down. However, shortly thereafter the market started going back up like a slingshot. I wonder what would clearly not have marked that event as a potential black swan. If I had shorted futures thinking it was a black swan, I probably would have lost quite a bit.

Just out of curiousity, at the time, did you think it had the makings of a black swan event?

Quote from optioncoach:


The point is that if a Black Swan event occurs the market is not going to dip 40 points and come back. It is going to fall fast and keep doing so for some time. If the news hits during trading hours and the futures are crashing you (well me since I am in front of the computer) will see it and if I have short strikes in trouble I can short a 100 lot position quicky and provide a PARTIAL hedge and reduce my losses. Each point would be worth $5,000 and if I miss the first 30 points and ride the last 20, I can make $100,000 in futures and produce a mini profit hedge to offset a part of potential losses.

This is an emergency measure.

The risks are:

1. Not being in front of the computer when the caca hits the fan and missing the whole crash; and

2. Shorting finally at the bottom and watching the market move sharply back higher. To mitigate this risk I probably would not do 100 contracts unless it was really a bad bad event.

So it is not a perfect hedge and again I will only use it when the market is falling hard and something bad happened and no clue as to when it will stop.

But in all honesty I do not have the perfect hedge for an unexpected event except to not be 100% in the position. Otherwise I am working on using VIX Calls and ES futures to stop the bleeding and get out. Since Black Swans are very rare, all I need to do is survive. Then I can just keep trading and make it back eventually as opposed to those who blow up and are never heard from again. [/B]

 

[Maverick74]

Quote from GATrader:

I agree with some of your points specially the optimizing of position size to be able to sleep. However, there might be better ways to hedge that for it does not make sense to hedge a limited risk position thru the use of potentially unlimited loss positions. You'd be better off buying wing puts . The manner in which you describe trying to get out of this hole by overhedging futures and making another 100k in the process is nothing but doubling down or Martingale?

Agree, I think the optimal hedge is just to buy your short puts back at the mkt immediately and call it a day. Perhaps buy a few extra as a lottery play to see if you really do get the big one. A general rule of options trading is never use hard deltas to hedge soft deltas. Old axiom on the floor.

 

[rdemyan]

So you buy the short puts back and let the long puts run. Again, going back to my previous post, I can see cases where it starts out looking like a major market moving event and then turns around and shoots back up (London bombing last July).

Or was the fact that that bombing took place on foreign soil mean that it wouldn't have as much impact.

Quote from Maverick74:

Agree, I think the optimal hedge is just to buy your short puts back at the mkt immediately and call it a day. Perhaps buy a few extra as a lottery play to see if you really do get the big one. A general rule of options trading is never use hard deltas to hedge soft deltas. Old axiom on the floor.

 

[rdemyan]

What's a wing put?

Quote from GATrader:

I agree with some of your points specially the optimizing of position size to be able to sleep. However, there might be better ways to hedge that for it does not make sense to hedge a limited risk position thru the use of potentially unlimited loss positions. You'd be better off buying wing puts . The manner in which you describe trying to get out of this hole by overhedging futures and making another 100k in the process is nothing but doubling down or Martingale?

 

[Maverick74]

Quote from rdemyan:

So you buy the short puts back and let the long puts run. Again, going back to my previous post, I can see cases where it starts out looking like a major market moving event and then turns around and shoots back up (London bombing last July).

Or was the fact that that bombing took place on foreign soil mean that it wouldn't have as much impact.

It's called trading. Anything can happen. How many shock events like that do we really have. It's not like you are going to get screwed everyday. Why take the risk? So once a year you get tricked by buying back the short puts. You don't need to buy them all at once. Scale out of them and force the hand of the market. If the market quickly turns around and rallies, maybe you only bought back 20% of them, you keep the rest. These are the situations that make or break a trader.

 

[Maverick74]

Quote from rdemyan:

What's a wing put?

Wings are the options outside the short strikes.

 

[rdemyan]

Mav:

Since I've got your attention, I had a question for you several days back, which I never got an answer on.

You were talking about probabilities and throwing the dice. My question was on program trading. About a month or so ago I posted a chart showing how program trading had increased from 10 or 15% of volume (I think it was 5 years ago) to over 60% of volume today.

Since program trading is controlled by a relative few, I can see how these relative few could "stack the deck" so to speak thus screwing up the probabilities you were speaking of.

Thanks for your opinion on this.

 

[Maverick74]

Quote from rdemyan:

Mav:

Since I've got your attention, I had a question for you several days back, which I never got an answer on.

You were talking about probabilities and throwing the dice. My question was on program trading. About a month or so ago I posted a chart showing how program trading had increased from 10 or 15% of volume (I think it was 5 years ago) to over 60% of volume today.

Since program trading is controlled by a relative few, I can see how these relative few could "stack the deck" so to speak thus screwing up the probabilities you were speaking of.

Thanks for your opinion on this.

I'm not sure I understand what you mean by stacking the deck. You are making the assumption they are all conspiring together when in fact they are usually trading against each other. The nature of most programs is mean reversion. So any move caused by program A, is likely to be faded by program B. This is why we have seen the decline in spot volatility the last 5 years. Most of it is the simple and natural effect of various derivatives rubbing against each other like atomic particles.

Think of all the derivatives we have that move the SP 500. We have the big SP 500 contract, the e-mini, options on the big sp 500, options on the e-mini, the SPY ETF, options on the SPY, OEX options and XEO options, SPX options. Then we have all the Dow derivatives that affect the SP. Then we have all the index funds that replicate the SP 500. That's a lot of friction. Because of the increase of more and more derivatives, it becomes harder to have sustained moves. A lot of arbitrage taking place as well as mean reversion trades.

This only adds strength to my argument about the randomness nature of the SP 500 and why it's regarded as the toughest contract to trade directionally.

 

[Sailing]

Mav,

You opened up an invitation to join you and your group in Chicago. If you don't mind, I'd like to take you up on that offer.

We have a group of about 30 traders, most with 7+ figure trading accounts. There is very little support here in Grand Rapids, MI for such accounts and knowledge base, as compared to Chicago.

I think visiting VT would and could be beneficial for both parties.

Could you PM me information.

Thanks,

Murray

Quote from Maverick74:

I'm not sure I understand what you mean by stacking the deck. You are making the assumption they are all conspiring together when in fact they are usually trading against each other. The nature of most programs is mean reversion. So any move caused by program A, is likely to be faded by program B. This is why we have seen the decline in spot volatility the last 5 years. Most of it is the simple and natural effect of various derivatives rubbing against each other like atomic particles.

Think of all the derivatives we have that move the SP 500. We have the big SP 500 contract, the e-mini, options on the big sp 500, options on the e-mini, the SPY ETF, options on the SPY, OEX options and XEO options, SPX options. Then we have all the Dow derivatives that affect the SP. Then we have all the index funds that replicate the SP 500. That's a lot of friction. Because of the increase of more and more derivatives, it becomes harder to have sustained moves. A lot of arbitrage taking place as well as mean reversion trades.

This only adds strength to my argument about the randomness nature of the SP 500 and why it's regarded as the toughest contract to trade directionally.

 

[rdemyan]

Mav:

I don't recall you posting on the VIX hedge strategy that we've been banting back and forth on this thread. The strategy is to buy OTM VIX call options to hedge bull puts in the case of a black swan (not just an "ordinary" drop). When the black swan hits, the volatility should spike up making the VIX call options much more valuable and hopefully offsetting losses in the bull puts they were meant to hedge. At least in theory.

There was a lot of back and forth as to whether there would be any takers when we try to sell those VIX calls after or during the huge spike. Also, the point was made that the options are really on VIX futures and not the spot VIX.

Any thoughts on this?