Make up your mind, is it a risk argument, or is it a margin/equity argument? I have a lot of money sitting on the sidelines earning 0.01% a month. My decision to pick up an August position has *nothing* to do with the current July positions.
Maybe you didn't catch this, but my custom developed application currently hedges *at the money* options. So, I don't view options coming back ATM as catastrophic events at all. I wouldn't be selling on a prayer that the underlying stay far OTM. It's within the realm of possibility that I'll lose 20 nickels, but very unlikely I will ever lose 40, 50, or more nickels.
I don't want this to get into a personality match, but you are speaking as a rookie options player. There is noting wrong with that, but others who have seen things you have not, are offering sound advice. It's up to you to decide whether it is sound or not and whether to take the advice. That's where things stand. You heard the opinions now make your decision. I can tell you from bitter experience that the issue is not the 'unlikely' possibility of losing 50 nickels. It's the very near certainty that one day you will lose 1,000 nickels (if you are lucky it will be only ONE thousand). Because this is an opinion and not a fact, there is not much point arguing. I've elarned that the last nickel is for someone else. And do you really mean to say that you are short these waaaaay far OTM options and hedged with stock or futures? What about downside risk? Mark
Well, granted, I might lose a few extra nickels because my code isn't optimal... but it's not going to be dollars.
I think I've come in here with a reasonably humble attitude. I'm very open to learning on every angle. However, I have to say, there's a lot of dogma about the way things "have to be". I don't think there's a lot of free money out there, but the assertion that my code will lose a thousand nickels on any particular position is really nonsense. My code is delta- and gamma- hedging using the underlying, on a every-minute basis, for all of my positions. There's of course no way to hedge completely against a 9/11 type event (especially if it happens with the markets closed)... but short of that, I know what my likely losses are. So unless you happen to be a veteran of a trading strategy that's doing the same thing... frankly, why should your risk profile be the same as mine just because we trade the same instruments? Is the risk profile of someone writing naked options the same as someone buying call spreads, just because they're trading options? I know there is no free money out there, so I'm not claiming that I've found a huge pool of alpha, and am rolling in the returns. I'm just about break-even in real time results, in fact. I'm not going to give you backtesting results, because they're meaningless (and obviously positive or I wouldn't be trading this). But in the 3 months that I've had this thing on full throttle, I've been -3%, +4.5%, -1%. So, could I have a down month where I'm -10%? Absolutely. Could I have a down month where I'm -50%, or more? Very, very, very unlikely.
It sounds like you have a well thought out system, but your original question and statements such as these likely prompted the advice you're getting. There are folks a lot smarter than me here, but to clarify my earlier post (and if newbies are trolling). Your specific question was regarding a call you sold that's nickel bid. Tomorrow it'll very likely be nickel bid or less. And you'll likely get that nickel. And you'll likely have 20 or more trades in a row where you get that last nickel. Then you'll get a buyout or other news when the markets are closed that'll wipe out the previous 20 or more nickels. This is not a risk to your portfolio as a whole, so of course you're not going to "wipe out". I personally just don't think the nickel is worth the eventual aggravation. And if you think it won't happen, well.. While the market is open your hedging system, optimized or not, will likely keep you out of major trouble. Problem is that's not where your risk lies. You state you sell puts. This is more where my earlier thoughts were centered. I hope you know your "system" is not going to do SQUAT to hedge that risk. Holding out for the last nickel there is highly questionable.
Thank you for the well considered response. It's still very much an open debate in my own mind, as well, which side of the risk/reward balance this decision falls. But I simply don't agree it's a catastrophic risk... ... what keeps me at night isn't the probability of APWR gapping back up to 20 overnight, but rather what you alluded to: my other 60 still ATM positions gapping down 20% because of something happening in Iran. I've tried to lessen the risk by dividing evenly between puts/calls... which means I only sleep uncomfortably, rather than not sleeping at all.
If you don't mind me asking, how much of a percentage of your strategy is the commission on hedging costing you?
The question is: Why would someone who believes in hedging risk want to take the chance of seeing a gigantic gap one morning - perhaps after a nuclear bomb destroys a major city, or a major assassination, or maybe just global panic for no good reason? And what about a whipsaw? The hedges you put in place to protect options that have large negative gamma can be very costly. Why take that chance? There is so little to gain from that last nickel. That's the point under discussion. Have you ever seen an option close at $2 one day and open $30 bid the next? And I'm not referring to an individual stock that has gone bankrupt or been taken over. If you have enough margin room, and capital to withstand every one of your short puts moving from a dime to $10, then you are likely to avoid being wiped out. But why would you want to take that chance? It's because you don't believe it will ever happen again. At least it won't happen to you. It's your account and you make the decision,s but when you tell me it's nonsense, I tell you that you have no respect for the unexpected. Yes you know what your likely losses are. So what? Everyone else knows the same. What are your unlikely losses? What do you think you will lose in a 10-year, wost case scenario? Do you even consider such events? Good trading. Mark