what is a better alternative for insurance on a covered call position than just buying an outright put. The scenario is that the price is starting to move south towards the covered call strike price and I want to put some insurance protection on before it gets there. Buying an outright put seems too expensive. I am looking at a few spreads but not sure which one suits best. A few I’m gandering at are a short put ladder, put back spread.... seems like a better option would be put there but I can’t put my finger on it. Again, a key point is that it is approaching my CC strike, and I also don’t want to overhedge if price reverts north...almost need some sort of condor?
I definitely agree with keeping it simple, but ideally wanting something to mostly protect downside, so if price drops significantly the insurance hedge would keep paying all the way down so to speak.
Maybe the put is the keep it simple approach.... just seems that if I’m willing to concede gain to the upside, and/or take a slight loss on a next move downward, that there would be a spread for that - that would be cost less than buying put.
You are currently net short one put. To cover that risk, you somehow need to get net long one put. Maybe try some put 1*2. Graphing it is easy and you can see if that works for you. Welcome to the world of options, where there is never one better than the other, but only choices between different surfaces. -Enjoy
A lot depends on the specific underlying and DTE, but you're thinking flexibly enough (IMO) -- in particular, in thinking about it as a separate trade. I would add "at a separate time" as well -- perhaps a put condor at the next expiry might prove handy. Just spit-ballin'.
If you're concerned enough about the position that you are now considering risking funds to protect it, then your best bet is just to close the position. Going to cash is a valid trading decision.
I totally agree. And to take it one step further, I'd say this is the sort of thing you should decide before entering the trade in the first place. As someone once said, "prepare for war in times of peace."
Yes sir I agree. I should mention this scenario is still a theoretical one. I'm still trying to iron out the pitfalls in a trading system. The system essentially tries to mitigate risk by reacting to the price movement after entering a position. As of right now, system is short timeframe - daily or weekly options. So basically, in order to lose in this system, several series of price movements have to move against you instead of one, hopefully lowering the probability each leg of the trade.
"The system essentially tries to mitigate risk by reacting to the price movement after entering a position." "in order to lose in this system, several series of price movements have to move against you instead of one,..." That first sentence raises my eyebrow. The second doesn't sound plausible - particularly in reference to linear products.