First the hedge works better if it is above the your short strikes in my opinion. So if you have the 1160/1150, the perhaps the 118/117 or 117/116 so that you can make a profit ahead of an adjustment if need be. Second, I was looking into the FLYs if I thought the cost was too much for the long puts or put spreads or if I had a large distance I wanted to FLY over. $0.30 for a hedge is not too expensive. If I collected $8,000 in premium I would not mind spending $1,500 on 50 spreads as a partial hedge. But I still think it works better if it is at higher strikes than your short strike. An example of where I might look into the butterfly is if SPX moves back to 1200 and then bad news is coming and the market starts to turn negative. Perhaps I would test out the 120/116/112 FLY as an alternative to the put spread to get a cheaper form of partial hedge. The FLY would be used with a wide profit area rather than 1 strike apart on the SPY. It has its drawbacks as has been pointed out but if the market drops over some time towards 1170, the the spread will earn some money and and partially finance an adjustment if needed. Nothing is fixed really and these are some of my suggestions. I have also been looking into put ratio spreads which I have traded a lot in previous years. It does have some negative sides but basically you can have a really wide profit zone at little or not cost. For example, if you look at the 119/116 put ratio spread (1:2), you could enter the spread for almost no debit or even a credit and your profit zone (assuming even cost) goes all the way down to 113. I do not have time to go into great detail so do not jump into this yet. We can walk through it. It does have naked options, gamma risk but does have some good theta and wide profit zones. If the market is near the short strikes at expiration you greatly incease your profits. Just take the bottom wing off the FLY. I do not want to get off track because this is more advanced and I do not recommend it for people unless they have traded put ratio spreads before. So please disregard if this is new to you. I added it in to give you more to think about.... ON PAPER! Phil
OX finally cleared up the positions so I wanted to put the final net profit number which is mroe accurate than my math and is net commissions as well. Final Net Profit: $1,946.20 Risk Margin: $250,000 Return on Margin: .78% Nothing to sing about but, I made money after many adjustments and as I covered in detail I got greedy on an XEO roll down which probably cost me about $8,000 in profit. That would put my return at 3.9% for the month. I @#$%ed up and paid for it. Greed will do that so I am still happy for my returns for the month and for the year to date posted above. On to November. remember I have 90 1150/1160 Put Spreads and will be watching it closely as well as adding to NOV positions. May even roll it down and add more contracts for a net credit for mroe safety. Phil
I guess buying a bear put spread above your short strike of your IC would make more sense. When you say 120/116/112 FLY, are you saying Sell 1 120 Put Buy 2 116 Put Sell 1 112 Put or buying the wings and selling 2 of the body?
Here is result of my OCT spread trade. I used about $7000 cash on TOS platform. I losted $265 not including commisions. On OX platform, I used about $22000 and make $40. However, after commissions, I losted $147. I rolled down some of my short at 1180, 1175, 1170. On IB platform, I made about $100 on $2000. Total lost was about $300 on $31000 or about 1%. Mistake: 1. I had some spy hedge at 1190/1180. I removed it when the SPX moved up. Had I kept them, I would brake even. 2. I did not sell enought credit spread on call side. I had only 7 contracts on call side. Things I did right: I kept a lot of cash margin at the beginning and was able to sell more put contracts when the market tanked to offset some lost. Overall, my lost is small compare to what I gain on other months. I survive one more month to trade.
Yes, a direct gamma hedge is preferable, but there is no method in which to buy anything approaching =gammas that won't eat multiples of your credit from the vertical. That is why I neglected that option. You're simply short too much curvature for such a nominal per contract-credit to effect any net-long gamma hedge < credit received on primary position. The time spread is slightly-additive to gamma risk, but the +$vega exceeds the -$gamma.
Riskarb, I appreciate your comment here very much. Could you please explain or point me where can I read the definition of "curvature" ? Is it the same as gamma ? Thanks, -Nick
rdemyan: What would the curves look like if the skew was taken into account instead of using constant vol?
The only skew I know about is the skew in volatility for puts relative to calls. Are you talking about using the actual implied volatility for each different option? The curves did use a constant volatility for each option that was just assumed at 15% for the first graph and 20% for the second.