OUT of the above at a $224,500 loss. DAX is underperforming, as would be expected on the downside. Will tally PnL this weekend. Lost the DAX double as well.
SPX bull no touch // weak synthetic straddle SPX bull no touch: 1225.00 Premium: $525,000 Payout: $1,000,000 [includes prem paid] Expires: June 20, 2006 Negative edge: a lot Strike/barrier volatility: 21% Initial Hedge: Short 270 Sep ES from 125900 average Symmetrical hedge: Short 500 ES Vol edge/atm: +300bp 100 points off lows in Dow, although the internals looks horrific as one would expect. I have an added sell stops on futures for 200 more in the 1245-range on Sep futures.
If one barrier is touched, it takes the entire position with it? Meaning the DAX hit causes you to lose the SPX as well? Basically 4 sides to watch instead of 2?
hi riskarb - it's great to see examples of how you hedge these... - is your hedging discretionary or what is your general methodology (if you could summarize)? i was looking at the spike in the VIX futures and options today - finally for the first time since they started trading, the vix puts got to a level low enough for me to consider buying, that's August puts, was great volume across the board - all the best.
The hedging is often discretionary, but more often I solve for a strong hedge that allows for a b/e at the barrier strike. Often I will hedge weakly when taking a directional bet [long in the above SPX no touch] or when predicting the shape of the distro to expiration. Most of the neutral-bias trades involve a slight-reduction in spot-hedge based upon strike-probabilities and adjusted for vol-surface. I will discount the hedge by strike vol edge and probability -- the allowance for prob. can simply be, "strong hedge * .xx delta" but I use something a bit more robust based upon 2-6th moment partials; dgamma/dx, dvega/dx, etc... There is a flat vol-surface in exotics with <10d expirations -- same-delta calls and puts are modeled as equal probability. Therefore double barriers are preferable to a no touch synthetic straddle. I am taking a bull-position in the latest SPX barrier -- I will never trade a single no touch weaker than 1/2 of the strong hedge req. IOW, that's as bullish as I can get while carrying a hedge.
No, they're independent. The problem was the beta. DAX was simply too weak to continue holding the position. My vomit-trigger was DAX 5400. The current SPX position is mildy positive PnL on the marks, including hedge.
sounds good, i love your explanations, they're way better than learning from a textbook best of luck with your trades!