Explain Put Writes delta hedged to me

Discussion in 'Options' started by nravo, Aug 13, 2008.

  1. nravo


    I noticed Max Ansbacher has been using this for a while, apparently abandoning his all naked option strategies of the previous decade. As best as I can tell he writes an OTM SP put and sells a SP future contract and adds short OTM SP puts until he is delta hedged.

    In other wrods he is short a SP contract and, given a hypothetical delta of .10 for the (very) OTM SP puts, he writes 10 puts.

    I see how the futures position is covered in case of a rise in price, and I can see how if the price drops, he makes a hefty killing on expired option premium.

    But if it drops a ton, he is dead, no? Yeah, the short futures will increase in value, but with a vol spike, there is no way this would make up for what happens to the 10 short puts, the increasing gamma and all that, right?

    Am I missing something? How does he hedge the gap risk? I am assuming he does, and he's not playing (Victor) Neiderhoffer.
  2. I used a similiar strategy in January. I wrote a slightly ITM put and sold a s&p 500 emini. Put on the trade the day before Martin Luther King's birthday. Of course, I did not know how to manage it. The max profit is received if the futures plummet, which they did on MLK' b-day. Of course, if I exited both legs at the close, I would have made the max profit. So, instead, I exited on Tuesday as the market was recovering because of an emergency rate cut by Fed. In 2007, I also wrote OTM puts and delta hedged with FUT. The problem is constant adjustment to stay delta hedged, and you end up losing money, for when you have to close out the working hedge (the FUT), it is inevitably at a loss--so it eats into the initial premium. And, in this case, if you end up covering when the market touches your put, and it rebounds, you will lose a great deal more. I am speaking from experience.

    If I were to trade short puts and short futures, I would write slightly ITM put, as above, but I would manage the trade better. Again, if the futures plummet, I would look to close out the trade rather than waiting "for assignment." If you close out the trade for a prof, you can always do another one. If the market goes up, you can close out the short put for a profit (say 70%) and hope that the future drops to profit levels or to minimal loss levels.

    The problem with these scenarios is delta and gamma. An ATM put has a delta of .50 (the FUT's "delta" is 1.00). So, the future moves twice as fast as the put either direction. Plus delta decrease over time and market movement (depends on direction and the amount of movement).

    In conclusion, I am not a fan of Ansbacher's new strategy. I know he used to do short strangles; he didn't do short iron condors, for if I remember correctly,he believed that the cost of the wingsas a waste of premium. I used to write puts deep OTM, and did it successfully until August 2007. By May 2007, I was hedging short puts with short futures. Unfortunately, I didn't know how to manage the hedge nor the short put. As it turns out, they't be efficiently managed.
  3. nravo


    Interesting. Does Ansbacher's current strategy use ITM, ATM or near OTM puts? I thought it was far OTM, like the put half of his old strangle strategy? Perhaps that's why it sounded so far-fetched to me. If he was doing far OTM with a deltas of say .10, he would be writing 10 puts for every futures contract sold, which is, to me, a huge naked risk, a la Neiderhoffer. But if he is doing an ITM, ATM or even slightly OTM, then the delta is like .50 or close to it on each put, so he is doing a two for one write, which, basically, is just a ratio covered write with puts, right? Nothing so radical about that, a common strategy. Still that naked exposure on the down side, even one contract, I can't stomach it; I would hedge that somehow, to avoid a massive blow up. I'm not as queasy going naked on the call side with futures or even index options. But puts? Can't stomach it. I do concede though that you can get burned on the call side, too. If I recall correctly, the emergency rate cut by the Fed in January shot the pre-market ES up like 35 points in two minutes. I remember it quite well, as I was naked a call and took my biggest loss of the year -- on an upside rally! In '08! Go figure.