What's your "crash-safe" way of shorting premium?

Discussion in 'Options' started by alassio, Apr 11, 2006.

  1. alassio


    Hi all
    What's your favourite "crash-safe" short premium position?

    The last months were quite favourable for my bull put credit spreads. For the next 6 months, from a fundamental point of view, I expect a bumpy ride with quite some downside risk, since a lot of risk factors (inflation, oil/commodity prices, housing market, consumer sentiment, hurricane season etc.) increase the probability of a middle term correction, which could also turn out quite large (>10% ?).

    Ok, assume we have to expect the bull market to end soon maybe with a large correction, what is your favourite position to profit from time decay, but could withstand a large correction?
    My current best guess is adding some OTM bear call credit spreads (which are still risky and dont' pay much) and buy some additional long wings for every OTM put credit spread, turning them into a partial backspread while still receiving some credit.

    Does anybody have better ideas?

    Regards, alassio
  2. ktm


    Having done this for a while, I would suggest having an arsenal of ideas and tools at your disposal - but do little or nothing now.

    I know that sounds ridiculous as you typically need to have the protection in place before the "event". The problem is that any real substantive protection is genuinely expensive. I have spent the better part of my trading career thinking the market is going to hell any day now based on all the things you list and more.

    First I would suggest selling premium in a way that gives you some natural protection - be further out of the money, add some spreads, buy back before it drops to 10 cents, etc... Second, while understanding the effects of a rising vix, develop a series of trades that you can establish in a fast/volatile market that will be executed as certain benchmarks are met. For instance, when the VIX hits 15, take some action. If we drop X % in a certain time period, take another protective measure. Basically, have a plan and follow it with zen-like discipline.

    That's my take. I'm sure other here have some good ideas as well.
  3. alassio


    Well, that's actually the point, if you want to have some real protection before the event, it's so expensive that the risk/reward isn't worth to enter the position any more.

    Currently, my approach can be summarized the following:
    - Always buy wings
    - Far enough OTM such that probability > 80%
    - Short only front month
    - Start with small position, may increase if market drops a bit but rebound is expected
    - Use additional wings and straddles for protective adjustments

    Regards, alassio