Can options be used to hedge against martingale risk?

Discussion in 'Options' started by xif99, Nov 19, 2009.

  1. xif99


    Martingale rules, high win rate, etc. etc., until that one day when you take a catastrophic loss.

    Can options be used to hedge against this risk? So it's like "oh no, I hit the maximum allowable loss, I just lost [huge percentage] of my account. But it's ok because it was offset by these options..."?????

    And my thinking is that, if your martingale RTM strategy exits for a profit after one of the first few levels, the options won't have changed much in value anyway so when you close that position it won't really take away from your gains. But when you get taken out because you've set a finite limit to your martingaling, then the options come into play and save your ass so instead of losing a huge chunk of your account (or your entire account,) you've only lost a much smaller amount.

  2. martingale rules typically do not lose due to a large market move.. they lose due to an eventual build up of a huge number of positions that lose a little each and kill you

    i doubt you could do this and succeed but maybe in stocks..
    lol.. obvioulsy you would need a set target and loss point
    .30 cents /.30 cents
    hmm... just flip a coin nd go long or short.. or alwasy go long if going witht he trend..

    5 shars to start..commissions will eat you up

    25 shares = 4.00 fees at ib= $ 7.50 - 4 fees = 3.50 profit
    25 shares loss 30 cents = 7.50 = 4= 11.50 loss!!!!!!! nope not enough

    50 = 8 cents break even = 11 bucks net
    50 = 19 loss..... if you can get a 2:1 win ratio then this one might work!!!!!!!!!! LOL

    50 shares, 100, 200, 400, 800, 1600, 3200, 6400 shares!

    you better trade a stock that you can afford to buy this many shares on!

    6400= 1,920-64 fee= 1856 profit
    6400= net - 1984 if you lose...
    if lost on all above you would be down

    net 1,905! fees = 60 net - 1965!!!!!!!! so you still have a loss of
    109 bucks.. the only way to ensure no blow out is moving you stops and making sure you know you can hit a higher winning percentage..
    I did this quickly so not sure if my math is correct.. there is no commission at the casino.. i.e. roulette!!!!! oh and if you lsoe the last one instead of win you are down!!!!!! HUGE.. AND YOU ARE NOW POT COMMITTED!!! A BAD PLACE TO BE


  3. xif99


    Um, they lose because of a big market move.

    Market trends heavily against you and you keep adding to it. Eventually your account is blown.

    OH, were you referring to each separate position as being larger than the one before? I was referring to pyramiding in a martingale manner to a single position.

    Go long.

    Price goes down.

    Add 2 more.

    Price goes down.

    Add 4 more.

    Price goes down.

    Add 8 more.

    Price goes down.

    Add 16 more.

    Price goes down.

    Add 32 more

    (net 63 at this point)

    Price goes down.

    Acocunt blown.
  4. In short, no, it won't work.

    Position sizing with Martingale is absurd. At best, it reduces your return by taking a larger than Kelly position sizing. This best case occurs only if you're making bets with substantial positive underlying expectation. Much more frequently it blows your account.

    Options don't work, because the premium you pay for insurance is proportional to the size of the position you're protecting, and thus become absurd when the position sizing becomes absurd.

    Size your bets at something between 1/2 and 1/4 Kelly. If you don't know what that number is, you have no business making the bet in the first place.

    Position sizing should be conservative and boring. The search for positive expectation should be creative and aggressively implemented. Failure often occurs by doing it the other way around.
  5. obviously you could do this and remain delta neutral but you would have to "trade" out of your options eventually.. you would need to stay delta neutral.. while adding positions.. and if market just goes sideways for a long period then you would start to lose some serious cash.. trust me there are better minds at work on tricky stuff like this than you and i and this entire elite trader combined with billions of dollars backing them up.. keep it simple and stupid and you will do much better trading.
    Good luck
  6. No and it can be illustrated by a simple counterexample. In a mkt that's slowly trending down, for instance, the strategy you describe cannot be insured by buying OTM puts.

    That's just due to the way options work...
  7. That some crazy shit.

    Anyways you should look into my penny options play on expiration friday.

    Sell all the OTM option penny closing calls or puts you can.