I've held calll ratio positions like this that were winners on both rallies and corrections. Skew flattening works in your favor on a break, and the sticky delta curve behavior works in your favor on a rally. Gamma is not really a factor in either scenario, maybe on a melt up rally. The strategy makes the most money on a breakout to the upside as your 2 long calls have no choice but to go higher in IV (from 5%) when the VIX has bottomed out. If the ATM IV has bottomed out at 10% then all the depressed sub-10% upside call IVs must gravitate to that level when the market approaches those strikes...ie the ATM/50 delta has a sticky IV.
Is anyone else thinking that there is valuable content in this thread, if only....if only....we could have a clear picture of what OP is actually doing? With respect @Sweet Bobby , I'm not asking for any trade secrets, but it would make things so much easier if you presented a clear example of what you are actually trading, rather than dropping little clues and hints and being vague. Your strategy won't stop working just because others on ET may attempt it (cos SPX volumes are enormous). And remember than the skill lies in the detail, so even if others know what your strategy is, then it doesn't mean that they can replicate your performance easily. I think what you are doing is this : you sell naked puts with far DTE. If market rises a little or VIX drops, you then buy lots of long near-term puts to negate the danger of the nakeds. If market then falls, your long puts make more money than your short puts lose, so you cash in. If market rises, you buy even more long puts and when there is a little correction, you sell these longs. Basically, you are using a combination of calendars and ratios to get positive results on a medium term time-frame of several weeks/months. If I got it wrong, then no worries.
Yeah, interesting stuff. I started buying otm calls in 2019 when I realized the deltas I had against them could take off some downside jump risk for me and the position hardly cost anything to have on. And also I made an annoying mistake in March, loading up on long deltas at SPX ~2400 against short otm calls, because I thought we would rally more and a lot of vol would start coming off. The deltas paid off but the vol dynamics made a huge headwind against the position. IV's were dropping but we moved so quickly through the skew that the short calls didn't even lose value. I should've been a buyer despite the vol drop. Seems I need to explore trading these things against other strikes to maximize the value here.
VolSkewTrader, when putting the call ratio , is it more critical to initiate it at extremely low IV regime, or it is more critical to initiate it in anticipation of price rise? If you could only know 1 dimension (either vol or price-rise), which one would you say matter the most for the call ratio position? Also, how many days-to-expiry do you suggest for the call ratios? All my questions are strictly about the index. Thanks for sharing your wisdom, I have been learning alot from your posts, Dest's, sle's and afew other members here.
In general you want a low vol regime...like a sub-12% VIX environment, and where the upside call IVs are trading in the single digits (irrationally cheap). You also want a relatively steep skew, which normally is the case in a low vol environment, where the upside calls are trading at a significant (both historically and statistically) discount to the ATM and the rest of the smile. I wouldn't do the call ratios in anything less than 30 DTE. You want the upside vega as well as the gamma on the rally, while the skew will work in your favor on the break. You also want to make money on any direction the underlying market (index) goes. So doing the call ratio delta neutral (e.g. sell 1 40 Delta calls & buy 2 20 Delta calls, or sell 1 45d call & buy 3 15d calls) is best practice. You can do it in any ratio combination: 1x2, 2x3, 1x3, etc.), buying more of the wings the steeper the curve and the lower the overall IV. In the end you're hoping for a breakout rally and vol to stop creeping in (VIX bottoming) as your upside call IVs will have nowhere to go but up. But you'll take a market crash too as you'll benefit from a small long gamma & vega position, and make really good money on the call skew flattening out.
Absolutely. @Sweet Bobby shared with us how he bought cheap tail hedges to his put writes to mitigate a potential crash. I was impressed after I read this thread. Of course the devil is in the details.
Hello ffs, Would you believe that I've never had anyone ask as nicely as you to share a little more details. Because of your kindness, here it goes. I maintain a golden ratio of 0.6 short puts to long puts or lower. Currently, I have 57 short puts and 130 longs. My total "cost" of all these puts combined is $1,606.26. I go way out in time and sell 3 puts, while simultaneously buying 5 puts, 50 points below my shorts, but in a shorter time period. I usually accomplish this entire trade at breakeven or a small credit. If I have to pay a debit, I don't put on the trade. You would be amazed at how often I can find these spreads for a credit. Then, I place a GTC order in the same expiration as my shorts to buy an additional 5 long puts, at a price much less than what I received in credit from the shorts. If the market moves up, I ultimately get a better price on my longs. If the market crashes, I hit the lottery. As time goes on, I will close my short puts as they get nearer to expiration. The trades are negative theta, but the options models are incorrect on the negative theta calculations on far out of the money options. But, I do get a little positive theta because I sell short income puts (anywhere between 5 and 10 delta) at about 60 days out in time. I only sell as many puts as I can justify by making sure I don't have significant risks on the thinkorswim analyze tab. I also can place a few long calendar spreads in areas where my t0 line starts to sag. With the big run up in the markets yesterday, all of my short income puts closed for profits! I will not place any new short puts on until we get a good down day in the market. Now, let me show you the price slices of the current portfolio. So, this is my current hedge with zero short income puts. Notice that there's nowhere on the board that I lose money. Admittedly, if the market goes up 15% I'm only making $300 or so bucks. If the market tanks 20%, I'm only making $3,400. But, the downside does NOT take into account the increase in volatility. So, let's look at what happens with a 20% drop in the market with a modest increase in volatility. Well I'll be damned! Look at that! And, please consider I've already hit the downside jackpot twice this year. Take a little of those funds and put it in real estate, etc. Then, start building another hedge trade. And this hedge is a perfect compliment to my other investments, 401k, IRA's. Not a bad little hedge factory that I have going on here, huh? Anyway, I hope I answered some of your questions. If you need any more specifics, just let me know. Sweet Bobby
The above chart had volatility in 5% increments. That's probably too conservative. Let's move volatility up to 10% increments at 20% down to see how ol' Sweet Bobby looks. Check this out! Damn! Pretty nice little hedge play if I do say so myself. While everyone else is bitching and complaining about the market tanking and their 401ks hitting the shitter, Sweet Bobby is at the beach with not a worry in the world. Ain't this some awesome crap?
A portfolio insurance is basically a risk covering strategy that helps you to avoid losses or cut them in a way where you can sell your trading options at a decided price in near future.However, you need to pay a certain premium for the same.
Good stuff Bobby. Maybe this is something you should automate and sell for millions to clueless wealth advisors who have no concept of hedging downside risk. Being diversified fails miserably when correlation goes to 1 for all risk assets on a big down move. Couple of questions: - How did you come up with your golden ratio of .6 short to longs? - Doesn't selling income puts take away from your downside hedge? Selling income puts just before a big down move can't be good for the overall strategy, where the overall hedge doesn't compensate enough for your equity portofolio losses. - Does this strategy only work for equity indexes? - On the March lows, did your hedging strategy make enough to cover all your losses in your equity portfolio? - Why don't you sell covered calls to reduce your portfolio insurance costs even more?