The Beauty of Options - Portfolio Insurance at a Discount

[deltaf0rce]

/ES is mainly what I trade in the hedged account. I have no idea what direction ES will go, but I try to look at a few things to help me in the analysis. What do you see below? Where would you be placing your bets? I see a butterfly trade in there somewhere. Anyone else see a potential opportunity here?

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That’s an interesting question as to what trades look palpable there and I’m looking forward to hearing others chime in

 

[destriero]

lol the dude lives in a $200K hovel and trades $30K after recent losses.

#clownshoes

 

[themickey]

...... At the same time I am building an amazing black swan factory. We gonna blow the lid off this thing when the shit hits the fan!

Sincerely doubt its gonna happen.
Every man and his dog is currently holding their breath awaiting the volcano.
Aint gonna happen, market always does what is least expected.
"Go baby go!" My ears are pulled back and tucked between my ass as we continue long.

 

[Sweet Bobby]

Sincerely doubt its gonna happen.
Every man and his dog is currently holding their breath awaiting the volcano.
Aint gonna happen, market always does what is least expected.
"Go baby go!" My ears are pulled back and tucked between my ass as we continue long.

It would appear that every man and his dog is doing just a bit more than holding their breath. What do you see below? All I do is place the probabilities in my favor.

 

[ironchef]

The bulk of Bobby’s strategy (Long PUT neat and short PUT forward) is not new, Chris Cole and Mark Spitznagel (among others) are trying to do the same, so we have some background from very clever traders. Just my guess, they all BUY protection NEAR and SELL FAR AWAY (of course, with different instruments and in different proportions at different strikes but the general rule still stands) to dampen the cost. The name of the game is not “how to get protection for free” but “how to get protection at the minimum possible cost”

Because a tail risk strategy, in an efficient marketplace, comes at a cost, not “free of charge”. Theta is the cost of being long Gamma (Taleb speaks of “gamma rent”). And the more Gamma you have, the more Theta you pay…. even if you’re not aware of this (I joint a description the daily P&L of an option positions, of course all these word have to be expressed by math, if someone likes it).

So, for not paying that cost, there are only two possibilities, not mutually esclusive:
1) one has identified a mispricing (unlikely but always possible), and will be able to use it as long as it will last (normally, it won’t last long)
2) one is not protected as he thinks, and the market – sooner or later, more often sooner than later – will find a way to let him know….

I spent many sleepless nights thinking about this.

1. Portfolio hedge. If in @Sweet Bobby's case, I put on his hedge from the get go right after I wrote my puts, I would end with zero profit?

2. I hedge after my initial position generated a profit to protect that profit?

3. Assume I have case #2. I can hedge one put with some long puts. how many depends on expiration and strike. And of course the cost should be reasonable.

4. So, the hedge of a short put is some long OTM puts. This is just a spread. If the longs have a longer expiration, it is some diagonal.

5. To reduce my cost, I can adjust the strike. But the cheaper, the less protection.

6. What if I sell some puts to reduce the cost of a hedge? This is now @Sweet Bobby's portfolio insurance.

7. It is not free or riskless. Another short put increases the risk when a black swan hits and the portfolio is now not fully protected.

8. I used BSM and some real SPY + VIX data to try recreate/backtest the hedge.

I haven't done all the combinations, just trying out some put writing, for example wrote one in Dec 2019 and in Feb, put on your long/short hedge, close everything out after the March black swan. Result: I didn't get any outsize profits.

I have a feeling @Sweet Bobby was either lucky or he was hiding his real method. He was lucky if he made a killing in this March 2020 black swan event, by pocketed his long and just rode out his shorts. Lucky because the market recovered so quickly. He is a trading genius if he did not ride out the shorts.

I appreciate your or @Sweet Bobby or @destriero or @taowave or anyone else's comments.

Thanks.

 

[themickey]

It would appear that every man and his dog is doing just a bit more than holding their breath. What do you see below? All I do is place the probabilities in my favor.
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I can assure you of this, conventional TA and indicators on the markets these days don't work!
I watch sentiment and correlations closely, most times when the market goes bullish it yanks back bearish, and vice versa.
The only given I can see is the market is supported more than ever by gummint.

 

[traider]

I spent many sleepless nights thinking about this.

1. Portfolio hedge. If in @Sweet Bobby's case, I put on his hedge from the get go right after I wrote my puts, I would end with zero profit?

2. I hedge after my initial position generated a profit to protect that profit?

3. Assume I have case #2. I can hedge one put with some long puts. how many depends on expiration and strike. And of course the cost should be reasonable.

4. So, the hedge of a short put is some long OTM puts. This is just a spread. If the longs have a longer expiration, it is some diagonal.

5. To reduce my cost, I can adjust the strike. But the cheaper, the less protection.

6. What if I sell some puts to reduce the cost of a hedge? This is now @Sweet Bobby's portfolio insurance.

7. It is not free or riskless. Another short put increases the risk when a black swan hits and the portfolio is now not fully protected.

8. I used BSM and some real SPY + VIX data to try recreate/backtest the hedge.

I haven't done all the combinations, just trying out some put writing, for example wrote one in Dec 2019 and in Feb, put on your long/short hedge, close everything out after the March black swan. Result: I didn't get any outsize profits.

I have a feeling @Sweet Bobby was either lucky or he was hiding his real method. He was lucky if he made a killing in this March 2020 black swan event, by pocketed his long and just rode out his shorts. Lucky because the market recovered so quickly. He is a trading genius if he did not ride out the shorts.

I appreciate your or @Sweet Bobby or @destriero or @taowave or anyone else's comments.

Thanks.

Let's just accept that Bobby is a trading genius with 30k since he won't be forthcoming with more details.

 

[Sweet Bobby]

Let's just accept that Bobby is a trading genius with 30k since he won't be forthcoming with more details.

Whoa! Where did this come from? I've shared everything that I can think of. Better to ask me a question about something you are not clear on that to say that I am not forthcoming with the details.

 

[ironchef]

I spent many sleepless nights thinking about this.

1. Portfolio hedge. If in @Sweet Bobby's case, I put on his hedge from the get go right after I wrote my puts, I would end with zero profit?

2. I hedge after my initial position generated a profit to protect that profit?

3. Assume I have case #2. I can hedge one put with some long puts. how many depends on expiration and strike. And of course the cost should be reasonable.

4. So, the hedge of a short put is some long OTM puts. This is just a spread. If the longs have a longer expiration, it is some diagonal.

5. To reduce my cost, I can adjust the strike. But the cheaper, the less protection.

6. What if I sell some puts to reduce the cost of a hedge? This is now @Sweet Bobby's portfolio insurance.

7. It is not free or riskless. Another short put increases the risk when a black swan hits and the portfolio is now not fully protected.

8. I used BSM and some real SPY + VIX data to try recreate/backtest the hedge.

I haven't done all the combinations, just trying out some put writing, for example wrote one in Dec 2019 and in Feb, put on your long/short hedge, close everything out after the March black swan. Result: I didn't get any outsize profits.

I have a feeling @Sweet Bobby was either lucky or he was hiding his real method. He was lucky if he made a killing in this March 2020 black swan event, by pocketed his long and just rode out his shorts. Lucky because the market recovered so quickly. He is a trading genius if he did not ride out the shorts.

I appreciate your or @Sweet Bobby or @destriero or @taowave or anyone else's comments.

Thanks.

I backtested more combination of the Mar 2020 meltdown.

I am too incompetent, just couldn't make either the near-long/far short or near-short/far-long hedges worked unless I timed it, set one up just prior to the meltdown.

 

[Sweet Bobby]

I backtested more combination of the Mar 2020 meltdown.

I am too incompetent, just couldn't make either the near-long/far short or near-short/far-long hedges worked unless I timed it, set one up just prior to the meltdown.

Chef, what backtesting program were you using? I'm about to start testing myself. I appreciate your input.