When selling options, hedging is inevitable. There are two types of hedging: - one-time hedging, and - continously hedging (or dynamic delta hedging) The second one is very interesting. It is IMO the best and also the most profitable according to the very first few informations I read about it. It works like a rachet device by locking-in the current profits. The next hedging increment would be done if the position again gained in value, for example the hedging increment would be repeated after every x% gain the set of these related positions makes. I'm going to study this interesting trading tool. Pls let me know of your experience or opinion about this type of hedging, especially when selling options. Thx
Here's one paper by The Evil Empire<TM> which discusses when you allegedly cannot do continous hedging (always take with a grain of salt anything coming from that house... mostly its hidden ads for their own cr*ppy financial products...): http://www.emanuelderman.com/media/risk-non_continuous_hedge.pdf The continous hedging method I mean is also called "dynamic delta hedging". Other related keywords: rehedging, rebalancing, ...
botpro: Most ideas on this should prove very interesting, and hopefully usable. The basic "ratcheting" / "unidirectional valve" concepts should be applicable to many trading methods. I found rolling up my long call positions for some trend trading worked very well and applied a similar concept. It also bears similarity to the notion of "constant risk" for managing trades/positions, which has similar goal.
Botpro ....... You are cross-posting which can lead to the thread being deleted. I replied in your other thread "one-time hedging" vs "continously hedging"
No, this is a different topic; just compare the titles... The other thread was recently overloaded with many different things, it was time to split it up... You better should continue here the above mentioned second hedging method.
At 1:05PM you posted this in your "Strategy: Selling Put Options: The Best Income Method?" thread. Then later on at 1:54PM you started this thread. They are identical posts. That is cross-posting which is frowned upon by most forums.
"Continuous hedging" is not practical. You state this shit like it's a dictum. The basis of continuous hedging in short gamma is that you will earn the vol-edge in implied volatility over the realized vol expressed by the underlying to expiration, frictionless execution and zero comms. All of the papers ignore microstructure and commissions. You will hit +50-delta as you touch the strike. You have +20 deltas in initial exposure. The difference is expressed as gamma. The problem is that you only have $150/contract in premium in the puts, no more. Shorting 20 deltas at inception makes you neutral in the moment. You'll hate the -20 share hedge at 110, but love it at 90. I'd rather take a $50 combined loss at $110 or $90, then a $200-250 loss at $90 (no hedge). The trade is roughly symmetric in risk out to the strike, and equidistant to the upside. Getting neutral at inception is far more robust then waiting for the thing to turn lower and missing hedging opportunities. You can take seven points in upside to expiration. With luck, the realized vol will be lower with a churn lower in the underlying. You can earn on both the hedge and the primary position. NO, there is a distinct fukn disadvantage to waiting for the underlying to move against you: -Opportunity loss Shorting "later" after the move against will involve a greater delta position All hedge options are marked down ("gamma risk") Cannot benefit from time (synthetic vol) Volatility moves inverse to market -- vol will likely rise, larger MTM loss on primary By it's nature; a short put, dynamically hedged w/spot, will result in a synthetic short straddle if the underlying touches the strike. Anyone rational would take the initial hedge and structure the trade across a variety of sectors. It's horribly inefficient in terms of margin/haircut, but at least you're getting credit for the covered premium. I am a big proponent of discrete spot hedges in a port. margin account. It's often not feasible to trade DITM options as a share-proxy unless you're trading in excess of 10-lot primary positions.
And at about 2:49 PM EST I posted this one there: " FYI: For discussing "continously hedging" a new thread has been opened: http://www.elitetrader.com/et/index...-as-a-rachet-device-to-lock-in-profits.298295 "
You need to change the title to "lock-in losses" Hedges are not intended to be a profit center, and your continuous hedging idea with simply not work.