If I can generate enough cash with some rolls this week, I might start nibbling on SPY IC or at least one sided credit spreads. Would be a shame not to at least collect a few $ with the premiums being higher than they have been in a long time.
Thanks for all the ideas below. I gave this some thought while mowing the lawn, push mower, ear plugs in, so I tend to think trading issues over while I am doing it and have about 1.25 hours to do that every week because it keeps raining and my grass keeps growing. Most years it is brown by now and I take a few weeks off mowing. Some of my best ideas have popped in my head while mowing but also some of my dumbest (no you really shouldn’t build a mini plane using a lawnmower engine, well you can but does not make it a smart idea and you would likely end up making a flaming hole in the ground).
So here are the best options I can figure out.
1. Straight SPX/SPY put purchase. Most months will lose almost all of it. Have to adjust as the market moves. If your hedge was set up at 2700 and the SPX is now 2800 your hedge will not cover as well as it did when you put it on. Maybe 1-2 times a year pays out decently, once every 15 months is a lottery ticket. Can sell other options to pay for it but bottom line is you are buying insurance and we all know how that usually works out. Can roll it to at least recover a little of the premium you paid. This is what I put on Friday.
2. Risk twist. Cheaper than above good downside protection but leaves a gap at expiration where max loss can still occur. Same issue as above, needs to be adjusted as the market moves but starting 90 DTE gives you more time and less expensive even if doing 4 times a year. I suspect the payouts are about the same as straight puts since you are long puts on a ratio. Switched to SPY for example. 3 long, 2 short ratio with a 10 point spread. Similar to a back ratio or a modified butterfly.
3. Credit spread on SPY or SPX or /ES but you have to act quickly on adjusting. Say you sold the SPX delta 16 put and then bought an option 10 points below. For example sell 10 the 2600 and buy the 2590. If the delta on the short makes it to a delta 30 you would buy 3-5 of 2595 puts to effectively create a back ratio. No graph, we have discussed this as an adjustment in the #spycraft discussion. The only issue with this is you have to act quickly sometimes and occasionally the move is in the middle of the night like on 8/24/2015. The /ES was down 300 points when I woke up and any adjustment then was limiting losses, not making more $. At that point it was going to be painful no matter what I did. I suppose if you traded /ES you could adjust it in the middle of the night or even SPY and SPX now. The big advantage here is you take in a credit when you put the trade on so buying options could be taken out of the credit. On a big move buying extra options will cost more though. Likely would only have to adjust 2 times a year and you could also ladder and start 45 DTE to make the most of theta decay until the move happens. You also need to leave enough room between the strikes so that you can buy in between. The others are set and forget for a while, this one would need checking every day like any sold option. Most of us here do that anyway.
4. Front spread/back spread or back ratio depending on your vocabulary or possibly a #rocketmanhedge here?
On SPY assuming a 10% correction which I did with all of these, you sell one 265 put and buy two 260 puts for $175 debit. The debit on the risk twist above would be $219 for a similar looking graph. Also keep in the mind the straight put purchase is for 30 DTE, the risk twist and the back ratio are set up for 90 days and the credit spread at 45 DTE. So there are some timing differences and the time component would need to be managed on all of them. Front spread is buy one sell 2 so really would not help in this case, unless it was a call spread and set up for a credit. Then in a correction you would keep the credit.
So the winner is? Up to you. I suppose it depends on what you want. Lottery ticket go with straight puts but most months like a lottery ticket you will lose your money. The risk twist and the back ratio decrease the cost but still need a really big move to pay off. Advantage is you can get another 2 months out of them for a cheaper cost than the monthlies but in either case as the market moves would need to be adjusted. A 10% correction from 2800 is going to be a lot different strikes than a 10% correction from 2600 on SPX.
Finally we have the credit spread converted to a back ratio. Paid up front, theta helps you, but on those 5 standard deviation moves might not have time to pull the trigger at the right moment. But at least you are then risk defined and can probably roll until the market settles down. I was able to do that with a few of my accounts on 8/24/15 and actually broke even after about 3-4 weeks. Still there was a lot of red on the screen until then. Also the markets became really wide and it was hard to get decent fills. TS and TOS did ok with it, optionsxpress and fidelity not so much and is why I do not have accounts there anymore.
My personal vote is probably the back ratio or a credit spread adjusted to a back ratio early. Cheaper than a straight put purchase, longer acting, but still pays out the lottery ticket when needed and simpler than a risk/twist, less moving parts.
Floor open for discussion. Anyone have any other or better ideas please let me know 🙂
I am at the point in my trading career and my accounts are big enough a few of them need insurance most of the time. I plan to do these going forward and will report on what is the best cost/benefit ratio.
What do the IC or SPX traders think of this opportunity:
Sell Jul 16 2795/2800/2805 for $3.40. The risk is $1.60 with relatively large cushion. It seems attractive to me but I have little experience with IC’s.
edit: Present price 2799 +/- with price mid-point varying 3.30 to 3.50.
I’m starting to take a lot of trades off and putting fewer new ones on. I am doing this for these reasons:
1. The #SPXcampaign has not been working well in 2018. It was my core strategy starting in January 2015 and worked well through 2016. In 2017, I got crushed a little too much on the upside, and now this year’s whipsaw has been too difficult. I’m going flat in $SPX. Currently I only have a couple of OTM call spreads which I’ll be closing a bit cheaper. I will look to start fresh in the coming weeks or months after I assess the strategy.
2. I have been long a few tech stocks and selling calls. I was also rolling into strangles when calls got breached. In the last week the puts have been getting hit. So I’m keeping the stock for now but have closed most puts. I will sell covered calls if we move higher, or stop myself out if we move much lower or go into more serious correction.
3. I’m not feeling positive about the market. Of course, me typing this paragraph will likely mean today is the bottom! But the market action, the tariff fears, and other reasons for 2018 volatility do not seem to be abating. Plus record low unemployment is often what precedes a recession, and the nation’s debt and deficits are flying to new highs. I by no means am certain of a crash, and I wouldn’t be including this in my decision if it weren’t for #4.
4. My family is spending a month in Japan from late July to late August (my wife is from there, so we’ll be visiting family and touring). The NYSE opens at 10:30pm Tokyo time… I intend to keep trading lightly, but do not want to be going through volatility with lots of positions and having to stay up all night.
I hope to reset my mind, catch up on bookkeeping (both trading and household), and build out this website a bit more.
So, to summarize: I am closing out SPX, TQQQ
I’m keeping stock in AAPL, BABA, SQ, and FB, all with stops set in not too much lower than current prices. BABA is a bit underwater but the other three are nicely in profit.
I have stock also in these which are currently struggling: #PieTrades in MU and AMAT, and broken earnings trade in OLED. I’ll let these sit, sell calls, and dump them if they can’t recover soon.
The only #VXXGame trades I have are long puts in $VXX, a trade that would have worked every year for the past 9 (except maybe 2011), but is NOT working in 2018. Also long $SVXY stock and short a small amount of $VXX stock. I have way OTM long calls on UVXY and VXX, so I’m prepared to sell volatility should it get expensive.
Still short some puts in RH, YY, and GUSH, which I’ll allow to decay.
Long LEAP calls in PYPL and SQ which were cheap, so no reason to close. I will sell calls against these.
And that’s it! Let me know any questions you have about positions you were following.
With the Vol getting so low, is it a good time to buy some Leap calls in UVXY or VXX?
Some observations as I closed out another week. Good 3 weeks 🙂 the pull back a few weeks ago really helped.
1. Critical mass on accounts seems to be around 50k. At that point the compounding really starts to kick in and the account becomes self sustaining for positive theta, #pietrades, income trades. Trades that need to be adjusted do not seem to affect the account value as much at these levels as well. Trading 6 different accounts with different values, lowest $3500 so can really see the difference. Each contract adds a lot more cash each week. 5-10 contracts is where the income really starts to compound and pay off. Even 3 contracts is a lot better than 1 unless talking AMZN or PCLN.
2. Some names are just better than others. GM is out as soon as it closes this week. Names with perceived high volatility but don’t really move around a lot and have good premiums (0.5-1% per week minimum) do the best and are easier to adjust.
3. I try to suck all the time value out of an option but once down to 0.2 roll it for better theta decay.
4. defending trades, easier to do it before the option goes way ITM or better yet, roll it before it even gets there. You will loose a little in time value but by rolling earlier you can stay ahead and continually bring in credits. Now if it is sitting right ATM I will wait until the last minute to roll it but if there is any time left, easier to roll early.
5. Taking a slight directional bias really increases returns. Allows to sell puts closer to ATM and also time call sales better.
6. For small accounts the #supercharger seems to work the best. Better ROI than credit spreads, less adjusting, less risk overall (defined) and more cushion for pull backs as you are already deep ITM. However, have to work the spread on entry or the exit is not as profitable. For any of my accounts under 10k I will be doing a lot more of these. 10k and up probably #pietrades with some #fuzzies thrown in. Occasional #spycraft as well but to be honest the #supercharger are doing much better when we have pull backs and more consistent gains.
Sitting on my hands until Fri. Hopefully we have a pull back, at least a little one where no one gets crushed 🙂
Add another spread Jun 01 2740/2750 for $1.00cr, delta 0.14 when SPX 2730.01