MikeL 1:14 pm on Thursday, October 24, 2019

@hcgdavis Chris, what are the…

@hcgdavis
Chris, what are the current hedges you have on?
Can you please share some examples?

hcgdavis 1:42 pm on Thursday, October 24, 2019

Currently I have a back ratio on /ES. It was started with 95 or so days to expiration (DTE). Currently has 57 DTE left. In my core account I am long 4 2690 puts and short 2 2700 puts. That was cheaper than an out right put purchase.

Anyway, you can use SPY, SPX, or /ES for a general market hedge. I like /ES because the spreads are closer than SPX and can trade after hours. Remember 1 SPX = 2 /ES = 10 SPY.

The plan is I open the hedge when there is about 90-100 DTE and set my short strike 10% OTM. Then back ratio with the next strike down. At the time I put these on we were around 2800.

Close when there is 30 DTE, at least some value left and then reset. At the time I put these on they cost me $3225 but I had just rolled the previous hedges for $2900 profit so really these were cheap. So far there has been a market down turn every quarter that makes these explode in value enough that I can usually close them for a profit and use the proceeds to pay for the next hedge.

It has already paid for itself and I will always keep these on the rest of my trading career. . I almost cried when I closed them at Thanksgiving last year anticipating a Santa Claus rally. At the market bottom they would have been worth 57K per contract (I had 2) 😦

I will always keep them on now and actually hope they lose money (means the other trades are all making money). But for the market shocks Aug. 24-25, 2015, Feb. 6, 2018, last Christmas I don’t have to worry about losing another account. It also allows me to trade more aggressively.

Anticipate they will cost me about $2000 a quarter but I am playing around with some ideas to make them cheaper. Debit spreads, unbalanced or ratioed butterfly. OTM Straddle then back ratio if it moves. But have not been able to find the ideal ratio. Butterfly is looking like sell 1, long 3, sell 1 but may also work with a 2/4/1 ratio as well like a risk twist.

Long explanation but there are the mechanics.

Also have not been able to post much. We are making some changes at Traders Reserve and most of my trading time is spent working on that. There will be a live trading room at some point and I will be one of the moderators.

This ratio is to cover about a 100k account. The science is I am basically trying to cover the value of a 10% drop if the entire account dropped that much. Because volatility expands exponentially it usually ends up being more profitable. That seems to be the sweet spot between cost and profits when needed. To use an insurance analogy, my deductible is about 5-10% of the value of the account.

Hope that helps but as I said above, after my SVXY losses in 2018 and the /ES losses in 2015 I plan to always have a hedge on my larger accounts.
- MikeL 2:49 pm on Thursday, October 24, 2019
  
  Thank you Chris.

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