Donna, I do it alot like SPY and SPX, OTM and hiding behind support, and low prob of expiring in the money. You can usually get .50 way out there, and put on what you need to hedge, and basically still have a money making strategy going.
Just wanted to add one more thing, since Donna got me thinking. In a steep trend like we see in XAU, you could certainly be alot more aggressive. However , it depends on your definition of what you are hedging. At the tender age of 63, I'm into conservative treasuries, zeros, and cd type investments with very few individual stocks anylonger. My purpose is mainly to hedge and add to my trading portfolio that is strictly involved with options. I believe if you were trying to hedge a larger portfolio , a mil or more , this may not bee what you'd be interested in.
Hi all Long long long time reader, first time poster. Great thread, thanks ! I was very interested in the margin required to convert your bullish credit spread to a "fly" if infact you thought the crap might hit the fan. I checked with a broker and ran by them margin requirements on such a trade: Questions to broker: "...if i traded 1 bullish out of the money credit spread lets say 660/650 puts my margin would be $1000 per 1 contract... ...if I then added to my positions 1 bearish debit spreads lets say 670/660 puts, in real terms my net risk profile has changed and my margin should be reduced as in reality I really cant loose the whole $1000 if the market tumbles becuase I have parked above the credit sppread a bearish debit spread... ...in this the case will my intial margins be reduced and if so how are they reduced or am i still locked into the margin of $1000 for the credit spread plus now the cost of my new debit spread outlay..." Broker response: "...Our margins are calculated live on the fly so as your positions change we will work to get you to the lowest allowable NASD margins. In this case you will turn a short put vertical into a long butterfly and there will be no margin on this as you can not lose more than you paid for the spread..." Now, if I understand the fundamentals of converting to the PREGO FLY as discussed here then a reduction in margin requirements is possible for a retail customers... The broker was Thinkorswim (TOS). I hope that has helped ? SteveJ
That is why it always helps to trade options with people who understand options. So in cases of unbalanced FLYs you can still get the FLY net debit requirement instead of them treating it as two spreads with 2 different margin requirements. I think with ToS and OX a phone call to compliance will get you there. Then you credit margin is freed up for more spreads to salavage the position with deeper OTM credit spreads along with the PREGO FLY.
Coach I just surprised me that a broker that was on the ball wouldn't allow margin to be reduced with such an adjustment. Maybe you don't need to go to a prop shop now coach Anyway, great thread and I love the idea of following actual trades... Good work coach and everyone that has contributed so far... SteveJ
Donna v The assumption is I get "margin relief" on my credit spread corresponding to the number of new debits spreads opened? I have emailed the same fella to clarify and will post asap. Hope that helps ? SteveJ
Yes that is the FLY in the ointment so to speak because brokers automate their margin requiremens so the platform only recognizes evenly spaced butterflies for margin purposes. Also why they only recognize condors with equal distances between the strikes although the same margin approach can be applied and simply take the margin requirement of the larger side. The problem is how they set their platform up to automatically calculate margin.