Ok, here’s the latest entry into the #Fuzzy family.
Backing up a bit, there’s something every #Fuzzy has in common: A combo trade of a 2-part synthetic (long or short) coupled with protection for full risk definition. 3 legs, all the same expiration.
A Regular Fuzzy (the original one named after @fuzzballl) then uses short dated short hedges for trade debit recovery and weekly income.
An Atomic Fuzzy eschewed the short dated short hedges for a double size hedge using the same expiration as the core fuzzy–solving the problem of runover hedges.
Regular Fuzzy Pros: Efficient use of capital, risk defined, weekly income
Regular Fuzzy Cons: Protection very expensive in high vol, hedges frequently get runover
Atomic Fuzzy Pros: Efficient use of capital, risk defined, partial-to-full financing of protection (particularly useful in high vol)
Atomic Fuzzy Cons: No weekly income, which increases directional risk
This trade uses both a long dated hedge (matching the core expiration and quantity) and short dated weekly hedges. The trade, in essence, has a triple hedge! Hedge #1: Core protection, Hedge #2: A credit spread using the core expiration, Hedge #3 A short dated short hedge. Believe it or not…perfectly legal in a 401K. I will be attaching a slide showing risk graph setups, a proper diagonal setup on the risk graph should significantly reduce the hedge runovers.
Here is the exact trade setup that I did last week for a long on SPY (captured on the attached slide)
SPY May monthly: +263c/-263p/+259p (this is the core fuzzy) @5.62 debit, then add a CCS 269/273, same qty, @1.55 cr. Then enter the weekly income hedge: Apr 6 270c @.63.
Particular setup rules: 1. The 3-leg core debit = “X” 2. Use ATM + X for the anchor short leg of the CCS. Those 5 legs should give you a “ledge” type risk graph where the ledge is solidly above 0. Finally add in the short dated short hedge–the best graphs work up with the calls at the same strike as the CCS anchor on the long dated core, or higher.
Everything can be reversed for a bear trade. Here’s an Alligator Snap (bear)trade I did on QQQ this morning:
Jun -157c/+157p/+160c @ 5.09, 152/147 PCS @ 1.34 cr ($157-$5=$152 for anchor). Then an Apr 6 152 short put @ .77. This puts the starting trade debit at $2.98. Accrued credits on rolling the short dated hedge will attack that trade debit. The bear side of this trade, due to put skew, will allow for more lucrative put rolls in an uptrending market.
So, in conclusion, this trade brings the best parts of the regular fuzzy (weekly income) and atomic fuzzy (protection financing) together. Check out the attached slide for risk graph setups, let me know your questions. I have about 8 of these trades on right now, 6 traps and 2 snaps. I’ve already rolled short hedges from last week.
Thanks to @MamaCash for the creative name…I was just going to call it a Fuzzy Diagonal….but Alligators are way more fun 🙂