This is where I think you are wrong, as with any trading, timing is crucial, so, it is always better to wait for the best time, especially if selling puts and calls. This is what I meant about chart reading, as most good option traders can not read charts, they are maths minds, but if they could, they would clean up like the market makers do. J_S
A big issue, not to be minimized, are the overnight ranges...Look at a chart since the beginning of 2016...Not at all uncommon to have the ES travelling 30+ pts overnight...Meanwhile, you are sitting on these SPX options and haven't solidified your ES hedging. Even if you are attempting to hedge out the risk, the ES can and often does whip back and forth across a large range and it's possible to lose more on those hedges than you would bank on the credits received (more probable since you are short the strangle and hence more likely to short on weakness and buy on strength)...
very valid point . That is something that I was afraid of too ! I need to take a good look at this . Another possibility will be to hedge with a long put / call instead of the ES futures , the only thing is that I wanted to avoid paying for the long put / call at the time the trade is placed ( since the short options are far away from the index price )because then it will be a vertical spread which will generates less premium . Maybe legging in with a long only if one of the shorts are challenged. Would that be a better choice ?
Chris, please do not do this. As one of the more senior members here, I can tell you that this strategy has a probability of ruin of 100%. If you have excel you can do the calculations and see the math. Do yourself a favor and buy a decent book on probability and expected value before you trade options. The 10 delta option is already telling you there is a 10% chance of the strike being touched but that is NOT static!!!! It's continuously changing. Therefore, not only do you need to know the expected value at time zero, but you need to know all the conditional probabilities from t0 to T (expiration). I would say the reason 99% of option traders blow out their accounts is because they are horrible at math, calculus and probability. It's one of the reasons to get a job at most any trading firm they quiz you on this shit until you puke. So please roll up the shirt sleeves, put on a pot of coffee and start learning about probability. There are some great youtube videos that will help you along as well. Good luck.
Question: Does it make a huge difference regarding using Spx options than ES options of what he is trying to do? The credits he receive for SPX options would they be anywhere near of losses he could take on ES during normal ES price action? You are so right with China opening up way early and taking huge move in one direction, I am guessing option would have huge prem on open to get out, but would it be better to sell more cause of huge prem or add on more ES? To me this strategy be too complicated as two different animals and can't add or get out of one of them in middle of the night, if something were to happen with huge plunge by China which could make our ES hit point and then time limits kick in, he could sleep thru if on wrong side of ES. I am still learning options, so...
I'm not going to comment as to whether I believe this is a good strategy or not. I will say for most people that hedging SPX options with SPY stock might be a simpler solution even ES has a higher multiple than SPY. SPY will be used in a PM account to provide a margin and risk offset. A market maker with more resources would use ES to hedge.
Thank you all for your input. I will give this strategy another look . Also , I think Robert's advise to hedge with SPY stock is a more viable option . Hedging positions worked very good for me , for instance I've entered a stock replacement strategy on Apple buying deep in the money call options ( LEAPS) when the stock was at 102 but unfortunately AAPL continued to go south . Hedging the position by shorting delta equivalent in Apple stock at that point saved me couple thousand $ .
Remember that SPX:SPY ratio is around 1:10. You can also try and hedge with other SPX options, but during times of stress, SPX options are very wide.
If you're going to use ES as a hedge you should be trading ES options not SPX options. The margin differences between the two product classes are reason enough. Additionally seeing as how ES is becoming more of a 24 hour market over the last couple of years it behooves you to have the ability to do something about an adverse move anytime the market is open. Just look at 8/24 and ask yourself what you would have done there (aside from sweating bullets right before the open).