Hello traders, I'm kind of new to the trading world and I need some advise in what I plan to do : my plan is to short 1 x strangle on SPX at about 10 delta each leg, ~ 40 to 60 days to expiration . Then just don't mess with it unless one of the legs is touched ( if ever ) , point in witch I will short / long 2 x ES futures to hedge the challenged position . If SPX continues to go against my short position , the two /ES futures will cancel the loss as they will move along . If SPX moves away from the challenged leg then I will buy / sell the ES futures to flatten the position . The initial credit on SPX options and the potential additional credit from rolling down the unchallenged SPX leg will provide me with some cushion to play with the ES entry / exit points around the challenged SPX position . Does anybody see anything wrong with this plan ? Maybe some suggestions ? Thank you in advance for your time .
I trade Options, but mostly for very short term holds, as in same day to no more than a week or so, depending on what happens after I get filled. In the past, I thought about something like you said, but abandoned it as I had no intetest in studying all about volatility and adjusting positions to hedge risk, as it is a complicated area, and you are either into that type of trading, or not. What I have found, is that price is King, so, if you get a good handle on price, you need not worry yourself too much about complicated option strategies, once yoy know the delta and theta, but delta mostly, you have a good idea of what to expect if price starts to move erratically. It will be interesting to see what the options experts come up with, but you will need to see some similiar trades done by someone, as theory is no good when risking money on short SPX options, as if you get caught out with a black swan, or even a baby black swan, you might regret it big time. I have yet to see an option expert that can read charts correctly, and it eludes me why they do not make it their businesses to find out, as it could make some difference to their trading, turning good results into extraordinary results, but, what is, is! J_S
J S thank for your reply . The reason I'm using a strangle ( naked options ) and not a IC for example is because I can go far OTM with the legs and avoid a black swan situation that will not give me enough time to react with the hedge .As far as the other greeks or other variables are concerned , the way I see it is that I do not need to pay any attention to them .Only delta is important here to figure the hedge ratio. The strangle will be carried to expiration and in the event it goes ITM the ES futures will compensate for any SPX loss . I might be wrong but this is the way I see it now .
I started studying, back testing, studying options three years ago, till then all I did with options is hedge futures and do covered calls on long stocks. I never heard of hedging with overlying before. I am decent at reading charts and not so well at the Greeks, so I have gone the other way and just using the Greeks as much as not selling discounted or buying prem. I have made a system that back tests well so am in process of trading one lots for six months should be long enough, it has been programmed so it is more of watching the program doing right. I am using weekly bars, as much less watching, less trades. I think just about anything can work in options providing you keep track of them, however, just remember, the more complicated they are, the more you have to be around to watch them. So it comes down to are you going to sit in front of screen all day? Cause the ES can go 30 points and more in one direction. I don't know what SPX is to ES, say SPX moves one point, how many points in ES does it move? And is it always the same? Have you considered using ES options? Good Trading to You
The SPX moves pretty much in tandem with ES ( point for point + /- ). I don't think this trade needs to be heavily monitored . The SPX legs are far OTM like 264 points on the puts side and 186 points on the call side . If SPX approaches one of the short positions then I will watch it more carefully for the ES hedge entry and subsequently the exit points . Part of the credit received from the strangle and rolling the unchallenged side will help me create a cushion zone around the ES entry & exit so I don't go back and forth buying and selling in the event the index moves many times in and out of the money . Exit stop limits can be used as well .Moreover , since the SPX is european style , even if ITM I will not be worry for an early assignment . At expiration , the profit made on ES futures will cancel the loss on SPX and I will keep part of the credit . I incline to try it with one SPX contract only and see how it goes !
If it were me, I wouldn't wait until the market is within spitting distance of one of the short legs, I'd have an intermediate trigger point for the hedge. What I don't like about a strategy such as this is that if the market were to make an extreme move, those credits received don't compensate you enough for the risk and waiting until those extremes to hedge increases the likelihood of whipsaw...You should work on something that will trigger the ES hedges much earlier or perhaps something with weekly options, etc... Something else to note...I notice that there is a tendency for most to sell these "teenie" options far OTM for miniscule credits...OTOH, if it were me, I'd rather look at selling ITM spreads or something similar to reflect a bullish/bearish bias...I can determine my max risk with that spread and if my directional bias is correct, it has a very favorable R:R.
ES is a proper hedge vs SPX but you won't get a margin offset. You will have to fund the accounts separately and the loss from SPX will have to be funded if you get margin calls.
Thank you for your reply. The early intermediary hedge trigger points , I think , will be a smart move to improve the concept. As far as the credit received for SPX options , it is close to $20.00 / contract which for me is OK and I don't think I will be able to take a biased position in this volatile market anyways.
Robert , thank you for the remark . That is another good point to consider- how the margin will play in this . I was thinking that since the ES futures are settled daily , as both instruments will move , I will get additional funds added to my account every day , however I do not know if that will be enough to offset any increased margin requirements for ITM SPX options. I have only one PM account from where all transactions are funded or credited.
A few points that may or may not help. You are correct in approach, in that selling options can be much more rewarding than buying options, but it is entirely up to at what level you enter the trades, and what strikes you pick. See my recent post of SPX open interest for last fridays expiration, as it clearly shows the sellers were making money over the buyers, and I have a good guess who the sellers are. In the past, I sold Index puts and calls, and made bout 85 trades with not one loser. Black swan arrived, and even though I had protection for every put sold, as I was nearly all put trades at the time, my losses multipied overnight as the major indices started to do 400 point moves. It was an eye opener, to say the least. Cut long story short, I only lost because I panicked, had a bad broker, and did not fully understand what I was doing. I ended up giving back way more than I should have. Point, your approach is very valid, that I know from selling puts and calls, but you must fully understand all the ways you can adjust positions, if not, you will get caught out, it is only a matter of time, so do your work, trade small at first, and cover every angle at all times, do that, and you will be fine. J_S