Protection against catastrophy

Discussion in 'Options' started by hlpsg, Dec 1, 2009.

  1. hlpsg


    hello, I'm looking for ideas/books on methods to protect a basically short gamma portfolio from catastrophic events.

    I am defining such an event as one where you will not be able to place any orders of any kind. I'll assume the exchanges will all be down, or forced to close for a period of time.

    Thus any kind of hedge will have to be static I think, and already in place whenever you have captial at risk.

    Some ideas I've thought of to manage losses during such catastrophic events:

    1) Back month strangles for protection. Downside - very expensive to buy an effective hedge. Hedging power decreases with time also.

    2) Money management. Control the amount of capital at risk.
    Downside - expensive in the way that returns are cut drastically.

    3) Do not get too close to expiration, before gamma gets very negative.
    Downside - miss out when theta is greatest.

    Will appreciate any ideas or recommendations to books I can check out. Thanks.
  2. You get paid for being short gamma. You can't mitigate the risk of short gamma strategies and still expect to get paid (doing flies and other "lower risk" short vol strategies simply means you get paid less). A very appropriate expression from the world of FX offered by my fellow poster in another forum comes to mind: "you gotta put your c*ck in the custard".
  3. hlpsg


    Perhaps not totally, but down to an acceptable level. Just looking for the most cost efficient way to do it.
  4. spindr0


    Stating the obvious, if you are concerned about hedging short gamma then maybe the answer is some long gamma?

    Protective insurance costs money. The better the coverage you desire, the more it costs. The more you pay, the lower your return. It's the eternal trade off with options.

    One thing that wasn't in your list was to be in bearish as well as bullish strategies. That way, your potential catastrophe has some benefits as well.
  5. drcha


    You don't say what you are trading. Asset allocation affords some protection. If you can find several things to trade that are uncorrelated, you will be safer. Pretty much all equities are correlated with each other. That leaves bonds, commodities, currencies, or etfs/etns that are based on them.

    It is interesting how many posts here lately address this type of topic. I am glad to see it. I have been reading another forum, on which a guy is trading 80% of his retirement money in condors. He has made money for a few months, so he is just sure he is right, telling us all to f-off and die. I suppose he thinks I am just some witch who wants to rain on his parade.

  6. link please

  7. What you want is front-month strangles, not back month options. Theta is not an issue here. You want, need, + gamma (at much lower market prices).

    To guard against a catastrophe, buy some FOTM options at prices that do not cost a lot of dollars.

    Obviously if you want protection against a 5% decline, that is an entirely different story.

  8. jj90


    Short answer: backspread.
  9. Then do less contracts...

    Selling premium is picking up nickels and dimes in front of steam roller! Pay attention no problems. Don't pay attention... Lots of problems...

    It is what it is...
  10. Buy some OTM puts.

    Forget about gammas, deltas.
    Read about alpha (gamma/time decay) and you'll find short and long term options are the same.

    Read The Black Swan by Nassim Taleb.
    (and Fooled by Randomness as a primer).
    #10     Dec 2, 2009