SPX Credit Spread Trader

Quote from 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?
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I would stay far away from the VIX. There is a very good reason why hedgies and large buy side firms won't touch it. The idea behind the VIX was in good spirit but short on practicality. This applies to both the options and the futures. A much better hedge would probably be to have some long Gold exposure.
 
Quote from optioncoach:

Remember that was a 1 day change in the market, it was not a gap to open down 5%. That is a little different. 1 week after 9/11 the market did not open down 5%. I do not remember the open price but it opened and just kept falling. So you would have missed the first move but would have had time to add the short futures, in my specific case, and create a partial hedge and deal with your position. There would have been a loss but it would have been mitigated slightly through the hedge.
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As we have been working recently on this issue, IMHO whole thing is too complex for forum discussion, but some points are taken.

Theres is one point however missed in Market Shock Events, which is October 87. The gap was really bad and happened at open. I know that a lot has been done since to prevent such scenarios. BTW interest rates went up one day later. See yourself...
 

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I think ToS will meet your needs..



Quote from rdemyan:

Coach:

I think your advice is correct for me. This month, for example, I'm two to one bear calls to bull puts. Part of the reason I seem like a "nervous nelly" is because I have a significant loss from before to make up. One more bad event (like a black swan) and I could be out of the game for good. So mostly for that reason, I think I'm going to go all bear calls until I feel I can handle the put risk with shorting futures.

I'd like your advice on the following. With ToS I can elect to trade futures. So I'm thinking about adding this option to my account and then trading futures in the play account for a number of months until I feel comfortable with them. This way I can try different things, see how it affects my margin, etc and get used to how futures are traded.

Do you think ToS is a decent platform for this what I'm suggesting.
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I think many are still not understanding the use of futures in a Black Swan event. I am not trying to overhedge or trade to make money with the futures. They are a fast intraday hedge on a huge move to stop the bleeding so I can get out or adjust a position. Futures have unlimited risk but I am not adding, let's say, 50 contracts to a put spread position and just letting it run until expiration or overnight. If I slap on the hedge and the market quickly reverses and moves higher I take the hedge off and take a small loss. I am trying to preserve my capital and get out of the way of a crashing market. The unlimited risk is theoretical only because I am not putting these on to hold for weeks or even overnight. If the market starts falling hard and subways in 8 cities in the US were bombed I would short immediately and watch the charts after the hedge was put on. Hedges are not to turn the entire position into a profit, they are to reduce my losses so I can get out with as much capital as possible.

This is not a martingale at all because I am not doublng up my position I am adding a partial hedge that responds directly to a crashing market. A martingale would be do roll down and double my position repeatedly as the market was crashing. Hedging a portfolio with S&P futures is not a novel or new idea at all. If the market reverses strongly I take the futures off for a loss and unwind my positions and ook for new entries.

Remember that ES has a delta of .5 so I would never be able to overhedge any of my positions. It would only be a partial hedge. 50 contracts is worth $2,500 a point. If the market falls 20 points after the hedge it would be $50,000. On $300,000 worth of spreads this is hardly an overhedge, it is a partial hedge. If I slap on the futures and can close out my spread for a $150,000 loss then the futures also could be taken off for a net loss of $100,000. This cuts the loss by 33% and keeps a significant amount of my capital in place. An temporary drop of large sandbags into the breached hole to slow the flooding water so I can escape. That is the sole purpose. Not to turn the position into a net short futures position or make net money off the crash.


One thing that I am most proud of is that I have tried my best to make my decisions now ahead of time, become confident in them and thus have no fear of the Black Swan. It is not so much about whether the VIX options or ES futures will work perfectly, it s about taking steps as best as I can to mitigate damages and knowing I will never blow up. Trust me, it is no false sense of security, it is just honesty. I cannot fear what I cannot control because it will interfere with my trading. I can only study the risk, understand it fully and either accept it and trade or fear it and choose another strategy. I have lost money in the past and it certainly sucks ass. But that was due to my stupid mistakes. That I fear more :)



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?
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I personally did not consider the London bombing a Black Swan event. It was a limited incident in another country, though tragic as it was. It would not compare to a 9/11 event which would truly kill the market in a short amount of time. I would rely on adjustments if needed in such an event because I would expect an immediate reversal of the knee jerk reaction. Also, the experience of the Madrid bombing helped and its effect on the market.



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.
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Just a caveat that I hope need not be mentioned. My discussion of using futures is due to my experience with the futures and not meant as a recommendation for people to use something they ar enot familair with or do not understand at all. For many it is not appropriate tool to use and I would not recommend it. It is quite a different ball game and not meant for the average retail trader. They also should not give one a false sense of security as they have their own pros and cons and complexity as well. It is a tool I am personally comfortable with but not comfortable recommending to just anyone.

Trade what you know and know what you are trading...
 
Quote from ryank:

Damn! Tried to snag some puts this morning but couldn't get filled before the jump back up. :mad:
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Maybe I should have been grabbing calls on the run up! :p
 
Coach,
Do you know TOS's policy on trading the futures after hours? For example if we get nuked, can I short the ES on TOS after the American Markets are closed?

sd


Quote from optioncoach:

I am currently daytrading the E-mini S&P (ES) and becoming quite familiar with them. Since we have not had any un-clean Swan events I have not used them for hedging purposes.

They are very liquid with a 1-tick b/a spread and they do trade practically 24 hours. They can be traded with very low INTRA-day margins depending on who your broker is. I would only use these for an intraday immediate hedge of sorts and not hold them for days like you would a put or call partial hedge. Remember in the Katrina Flood in New Orleans when those helicopters were dropping those humongous bags of sand into the breach in the levies? That is what this is. A huge sandbag to stop the flood momentarily until you can fix it permanently (i.e., get out of the position most likely). So it is an immediate measure to protect yourself and get out or adjust if needed.

Thankfull, no need for it yet :)
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