The Beauty of Options - Portfolio Insurance at a Discount

[Sweet Bobby]

Sorry to break up the love fest,but how on earth are you down for the year???

You caught the perfect storm and were backspread bare minimum 1.6 to 1 with strikes 2 percent wide..

You state you were not trading like Karen..Not trying to bust your balls,but woukd you be kind enough to tell us what is really going on??

I personally wouldnt do what you are doing,but it appears several posters are very interested..

Hello Taowave, I hopefully addressed your question above. But let me further clarify. The original account is up 208% for the year after the mini crashes of February and March. Then, I totally closed that account.

In the interim, I put together a very small partnership with one of my lifelong friends and formed the partnership account that I showed today. We hired an attorney out of Atlanta, filed the paperwork for a Delaware general partnership, and set up the LLC here in Georgia. The fund is now in an incubation period and is NOT open to outside investors.

The current account has a profit on the BSH of $196. A loss on short income puts of $277, a profit on a few in/out spreads of $128, and a loss on a few 7 DTE credit spreads of $54. Total realized profit on those trades is only $58.

This portfolio is a hedge to other long positions via IRA's, 401(k)s, and other brokerage accounts. It is designed to not lose money in an up market and to make lottery returns on the capital in a crash. Although all the eggs are not in this basket, this basket has tremendous potential and additional funds will be added after the initial incubation period. I'm trying to be as forthcoming as I can on the strategy. Let me know if I failed to address anything.

 

[Sweet Bobby]

Now, here's the question that I need help on. Is the negative theta burn real, and if so, is it that big of a deal. I would prefer to have positive theta in the account. It has been explained to me that the negative theta on those far out of the money, way out in time long options is not real.

Okay, if it's not real, what is the actual theta, and is it going to result in major decay to the account. I can offset some of the quoted negative theta by selling income puts and various other trades like the Space Trip Trade. But, I don't think I can sell enough to fully overcome the stated negative theta. Any Greek busters out there, feel free to chime in.

 

[destriero]

Now, here's the question that I need help on. Is the negative theta burn real, and if so, is it that big of a deal. I would prefer to have positive theta in the account. It has been explained to me that the negative theta on those far out of the money, way out in time long options is not real.

Okay, if it's not real, what is the actual theta, and is it going to result in major decay to the account. I can offset some of the quoted negative theta by selling income puts and various other trades like the Space Trip Trade. But, I don't think I can sell enough to fully overcome the stated negative theta. Any Greek busters out there, feel free to chime in.

lol theta is real. People will chime in that theta doesn't exist as they're stuck in a rising vol market and they're persistent short vol or they are running some hedge overlay in short calls.

Vol is synthetic time; time is synthetic vol. You won't lose those $300 daily thetas if the vol rallies a point or two this week, or you win on deltas. You're going to WIN if we drop and vol-rises. You're going to LOSE as mkt rallies as time passes.

Vol trades inverse to spot (SPX) so you're going to need the mkt to drop for vol to rise.

Buying a 30 vol-line on day 1 will require a 35 vol-line on day 10 for you to maintain net liq; assuming no change in price (ES futures).

I didn't believe you bot the backspread because it didn't compute that you were short $300 theta and it turns out to be 1% of your account.

You cannot hedge that gamma loan locally--listen to me here. If you hedge (short theta) locally you'll only lose on you ATM stuff as well as your bear/long gamma position. IOW short OTM calls is not a suitable hedge.

You're going to lose $1500 this week on theta if SPX doesn't drop. So I'd reduce your exposure a bit if this $36K is the bulk of your net liq.

One last point. I can't see it now, but you're paying something approaching 35-40 vol for that backspread. Your vols may rise on your deeps, but on a lower premium. IOW, mkt rallies; strike vols rise (stickiness); but you lose 5x that amount on delta. You will start to accumulate a ton of deltas on the upside. That's not a good thing.

 

[destriero]

I gotta comment on this bc it's scary. You're long gamma LOCALLY here, but then you have this account Herpes on:

You're covered (condor), but it's a silly risk on a 5-lot ES asym-condor here.

You only received $3 net on the 10-lot puts due to loss of edge on skew.

1) Never buy the DITM natural fly/condor. If the mkt drops the microstructure is going to suck. Trade the iron.

2) Your local greeks are going to look OK but you're reducing the utility of your long gamma/backspread/diagonal.

 

[destriero]

Look at the difference in prem on the DITM put spread vs. the DOTM put spread above. What good is shorting a vol-line in puts when you're forced to pay 3-5 handles more in buying the 1850 wing?

Also, the DITM bear spread (2450/2500) is simply not going to quote when the mkt drops. You're going to have to quote the iron and invert to know where to quote the natural. ES vol doesn't quote the DITM spreads as they trade to D1.

Sorry Man, not shittin' on you, but you should know this. You were just paid three days worth of theta so put it to good use by fixing some positions.

 

[destriero]

I gotta catch a short flight but I'll leave it here. Think of theta/gamma in proportion to your marks. ES drops 100 and you're up 4K on marks, but your theta will increase. Market rallies 100 points and hooray your theta is manageable, but you're out $5K on net liq.

Local values (local risk) is a phantom. It's almost meaningless.

 

[Sweet Bobby]

I gotta catch a short flight but I'll leave it here. Think of theta/gamma in proportion to your marks. ES drops 100 and you're up 4K on marks, but your theta will increase. Market rallies 100 points and hooray your theta is manageable, but you're out $5K on net liq.

Local values (local risk) is a phantom. It's almost meaningless.

Des, I appreciate your input. With regard to the negative theta, I'm going off the conclusions formulated by Ron Bertino. I am most certainly open to monitoring this to see the effect that this has on the portfolio. There were times that he showed negative theta of over $1,500 per day, but there was no where near that amount of decay that occurred in the account. I am open to learning more about how this is going to work out.

Thanks,

Bobby

 

[Sweet Bobby]

I gotta comment on this bc it's scary. You're long gamma LOCALLY here, but then you have this account Herpes on:

View attachment 231900

You're covered (condor), but it's a silly risk on a 5-lot ES asym-condor here.

You only received $3 net on the 10-lot puts due to loss of edge on skew.

1) Never buy the DITM natural fly/condor. If the mkt drops the microstructure is going to suck. Trade the iron.

2) Your local greeks are going to look OK but you're reducing the utility of your long gamma/backspread/diagonal.

Des, so your trade of choice is the short iron fly? Can you at some point elaborate on your strategy. I know a lot of folks that are trading those at 0 DTE, but I've never really placed any flies.

Thanks,

SB

 

[shh]

I gotta comment on this bc it's scary. You're long gamma LOCALLY here, but then you have this account Herpes on:

View attachment 231900

You're covered (condor), but it's a silly risk on a 5-lot ES asym-condor here.

You only received $3 net on the 10-lot puts due to loss of edge on skew.

1) Never buy the DITM natural fly/condor. If the mkt drops the microstructure is going to suck. Trade the iron.

2) Your local greeks are going to look OK but you're reducing the utility of your long gamma/backspread/diagonal.

Hi Dest, at some free time, could you please confirm if I understood things correctly here man?

1-It is better to use 2450-2500 calls instead of 2450-2500 puts.
2-On the put side, it is better to use 2*1900-1650 spreads instead of 10*1900-1850 spreads. Does this decision depend on the skew flattening/steepening?

Could you please elaborate on these:
1-"You only received $3 net on the 10-lot puts due to loss of edge on skew."
2- "Local values (local risk) is a phantom. It's almost meaningless."

Enjoy your trip.

 

[Sweet Bobby]

Another month in the books. I had 5 longs expiring today, so I took a total loss on those of $522.60. This is totally expected since these were the very first longs I bought back on April 8, 2020.

Because the market was up big today, it was also a great day to buy 10 additional puts. Total investment on those long 10 puts was $1,018.20. I now have 57 short /ES puts, and 135 long puts. My total investment in the hedge is $2,624.46.

Here's the risk graph of the portfolio with the current greeks.

Check out that massive $371 daily theta burn! Ouch! And the account is negative deltas. Up day today, must have really hurt, huh? Well, let's take a look at how the account performed today.

Huh? Negative delta, big negative theta. Oh, but wait. The account is positive Vega! That must be the answer. With positive Vega in the account, that means that my account goes up as volatility increases. Volatility must have increased today to lift my account.

What the hell? VIX was down, but my account still increased. The answer must lie in the nonlinear nature of theta decay, right? It will probably all come out by the end of the week and I will be down like $1,500 before the week ends. That theta better hurry and come out, since the portfolio is up $1,261.04 for the week!