Lescor, How would you explain best why you had such a large exposure Friday? - A larger number of OPG orders than normal, and then they go in your favor right away so you start out and stay long with a relatively large position? - Multiple systems firing long signals repeatedly? - Lots of scaling-in? Based on how you trade your system(s), are entries fairly open-ended? Meaning, do you have cutoffs ever to limit exposure or do you take every signal / trade as it comes, and if that puts you full tilt on one side or another, then so be it - then you hedge? Thanks in advance. JS
Options are ideal for hedging, as that was their original intent. However, when one hedges with a stock, such as spy, it effectively is the same as closing out shares of the stock that you are trying to hedge. In other words, instead of buying spy to hedge against a short exposure of a given stock, one could acheive the same outcome by closing a percentage of the given stock that has the exposure. For example, suppose my portfolio has a net $2M short exposure. Perhaps I was long on 40 different stocks with a capital outlay of $4M, and short 59 different stocks with a capital outlay of $6M. To offset my exposure of $2M I may choose to go long with $2M of spy stocks to hedge my positions, OR I may simply close-out (scale-out) of some of my short positions. Fundamentally, I do not see the benefit of hedging instead of scaling out if you're hedging with stocks. Again, if you're able to hedge with otm long options, then I can see the potential benefit of hedging vs. closing some of your short exposure. Walt
Needless to say, options have their own bag of challenges, such as: - wider bid/ask spreads (especially when volaility is increasing) - slippage, higher premiums as the volatility increases (which exacerbates the theta effect) - the impact on the greeks relative to the expiration date, changes in volatility & price - etc. Nonetheless, your max loss can easily be planned, while protecting an adverse downside exposure...
I think you dont understand what lescor is doing. He has his positions on and believes that his positions will out perform the SPY over the day. So if the SPY rally 1% his positions will rally 1.2%. If the SPY fall 1%, his positions will only fall .8%. In regards to options, he has said that intraday buying power is not a problem, so there is no reason to pay any premium for a daytrade hedge. Based on some comments, I think that the Intraday Buying Power is something that people are not grasping. At a certain point in the day, it would not surprise me if Lescor has 25 million dollars of orders happening. When you combine the system, buying power, and his discipline, that is how you are getting these huge days. Please correct me if I misspoke on anything.
in your example, the edge is 0.2%. if lescor had $10M orders it only translates to 20K profit. either his edge is >0.2% or he hedges partially and/or trades around the hedge. i would guess it is both higher edge (at least last Friday) and partial hedging.
exactly right. the term "hedge" means to limit or remove further risk by likewise removing any further chance to profit by the exact-same amount as hedge size. to hedge a $1.5mil with $1mil of protection = closing out $1mil of open trade, leaving $0.5mil open for further risk and potential profit. exact-same result... the hedge caps risk and eliminates reward in equal measure. just a different way of accomplishing the same thing... close out a position or spread off the risk (and further reward) by opening an opposing position that neutralizes = cancels out the first
No.... not really. A 1mil hedge of SPY short against 1mil Long 50 stocks is not "cancelling out". The beta matters, the point of entry for the 50 stocks matters, the level of correlation of the 50 to each other matters. Lots of things matter... What you're doing is simplifying the procedure to suit your own understanding. The reality of the situation is that its much more complex. Being dollar neutral on a varied, multi-strategy portfolio is not a trivial task. "to hedge a $1.5mil with $1mil of protection = closing out $1mil of open trade, leaving $0.5mil open for further risk and potential profit. exact-same result" Simply not true Austin... I'd expect more from someone who has been in this business as long as yourself. Mike
The .2% was to just illustrate what is going on. The expected return will vary based on the entries on the stocks. On a huge gap down expiration day that percentage jumps considerably.
Mike has this correct. Closing out stock does not mimic what lescor is trying to do. He has positions that will outperform the market for a given time frame. If the market had gone down, those positions will have also gone down, just to a lesser extent then the SPY. Lescor probably has a atr/beta/dollar netural spy amount per position that he enters. So he would probably not be dollar neutral, but market neutral based on his system.
Some better assumptions in those recent posts. First of all, as I've posted before, some people, probably new traders or those who don't trade equities, assume that stocks move tick for tick with the market. Simply not true. Mike is right, 50 individual long stocks worth X$ is not the same as X$ worth of spy. In a nutshell, I'm trying to buy stocks at a discount to the market and sell those that are overvalued. The median line on what I consider under or over valued is my own assumption, or proprietary calculation if you like. So if I buy a stock at a discount, and hedge it with a spy short, I want the spread between those stocks to narrow, irregardless of market direction. It's not a net zero position. There are many factors that go into when or by how much I hedge. Volatility, time, total exposure, valuation, sectors, etc. This is all pretty simple spread / arb stuff or whatever you want to call it. A million guys are doing stuff like this, just that everyone has their own way of applying it and how they operate. And yes, in a high volatility, fearful environment, on expiration day to boot, things get more out of line and the profit margins go up accordingly.