I signed up for the Yahoo group a couple days ago. It will give some more great weekend reading to parse through historical threads. I am generally not a fan of selling options with expirations 45-90 days to expiration. All of the studies that have been shown where you get the best theta burn over those periods require (from my point of view) too much leverage to generate a reasonable return. Also, in the situations where you must adjust positions, you are not giving yourself as much flexibility with future calendar dates & strikes to work with. So a lot of the theories that I have developed incentivize me to stay as close to near term expiration as possible and then manage the position appropriately. I think this is not one way is the right way - it's more of, I haven't been able to get comfortable with the 6 sigma scenarios in the other way as much as I can in my approach. So a trader goes with their comfort level. I hope to really understand the theory around longer dated options trading by reading past posts.
One of the reasons that I have enjoyed my recent time on EliteTrader is that level of discourse from the people who write here. While some of the threads seem like flaim bait, for the most part, I see people genuinely interested in practicing their craft and sharing their perspective.
It's along these lines where I appreciate everyone's concerns around the necessity of hedges. I do not take any such comments lightly. When I first started trading, everything was hedged, but the more I have modeled disaster scenarios --- combined with my comfort with not requiring any cash withdrawals for a minimum of 12 months --- have slowly biased by trading into styles where there is the appropriate amount of sizing control vs. those that require spending units to buy hedges or to delta hedge with ES futures, for example.
Now having said that, I have not modeled the impact of ES futures hedges. And I model everything, so I have the homework to look at that and see the potential trade offs. I have found that vertical spread hedges are awful to deal with and do not offer the protection for the cost. So they are only used in my IRA account. The calendar hedge by purchasing 8-15% 1 month expiration puts with 10% of the collected credit had some very impressive early results in the modeling. That was a scenario where the cost - gain payoff may be worth it. However, the early analysis also indicated that a 10% drawn down of credit each week would have a tremendous impact on compounded weekly growth. So to maintain the same growth rate while putting on the hedge would require the ratio strangles to - perhaps - be tighter to ATM than initially planned to compensate. Again - more modeling to do.
Of course you need liquidity, no gap down, etc. Lots of things that one is making assumptions around.
FWIW, I have done scenario analysis on what would happen in a black swan event if the market dropped > 20% in a single day. If the number of strikes opened allows for a minimum 40% downside move before a margin call and the vix spiked to 150, then a three week roll would allow for a 10% reduction in leverage by closing puts, a move 8% lower in strike price (so now only ~9% ITM), and keeping the cash position the same or larger. This effectively, after the reduction in leverage, gives room for the peak-to-trough drop of 55% before the margin call kicks in. This is after a single adjustment, and we are close to the 2008-2009 scenario. And given that it was pretty much a 6 month ride down, I would have been heavily deleveraged along with monstrous call premium coming in through those six months. My estimates were that I would have been netliquidation value ahead after about 4.5 months of adjustments, and 2009 overall would have been a terrific return year because as the market flat lines, with the high volatility, the premiums for the normal positions after the deleveraging would have been fantastic. In many accounts quite sad that I didn't get to be running this during that time frame.
Cheers, everyone.
One of the reasons that I have enjoyed my recent time on EliteTrader is that level of discourse from the people who write here. While some of the threads seem like flaim bait, for the most part, I see people genuinely interested in practicing their craft and sharing their perspective.
It's along these lines where I appreciate everyone's concerns around the necessity of hedges. I do not take any such comments lightly. When I first started trading, everything was hedged, but the more I have modeled disaster scenarios --- combined with my comfort with not requiring any cash withdrawals for a minimum of 12 months --- have slowly biased by trading into styles where there is the appropriate amount of sizing control vs. those that require spending units to buy hedges or to delta hedge with ES futures, for example.
Now having said that, I have not modeled the impact of ES futures hedges. And I model everything, so I have the homework to look at that and see the potential trade offs. I have found that vertical spread hedges are awful to deal with and do not offer the protection for the cost. So they are only used in my IRA account. The calendar hedge by purchasing 8-15% 1 month expiration puts with 10% of the collected credit had some very impressive early results in the modeling. That was a scenario where the cost - gain payoff may be worth it. However, the early analysis also indicated that a 10% drawn down of credit each week would have a tremendous impact on compounded weekly growth. So to maintain the same growth rate while putting on the hedge would require the ratio strangles to - perhaps - be tighter to ATM than initially planned to compensate. Again - more modeling to do.
Of course you need liquidity, no gap down, etc. Lots of things that one is making assumptions around.
FWIW, I have done scenario analysis on what would happen in a black swan event if the market dropped > 20% in a single day. If the number of strikes opened allows for a minimum 40% downside move before a margin call and the vix spiked to 150, then a three week roll would allow for a 10% reduction in leverage by closing puts, a move 8% lower in strike price (so now only ~9% ITM), and keeping the cash position the same or larger. This effectively, after the reduction in leverage, gives room for the peak-to-trough drop of 55% before the margin call kicks in. This is after a single adjustment, and we are close to the 2008-2009 scenario. And given that it was pretty much a 6 month ride down, I would have been heavily deleveraged along with monstrous call premium coming in through those six months. My estimates were that I would have been netliquidation value ahead after about 4.5 months of adjustments, and 2009 overall would have been a terrific return year because as the market flat lines, with the high volatility, the premiums for the normal positions after the deleveraging would have been fantastic. In many accounts quite sad that I didn't get to be running this during that time frame.
Cheers, everyone.
