This is a really nice piece by the CME Group about options vega.
Just to recap I am currently short a total of 400 S&P500 November 20,2020 360 calls and long the 270 puts for the same day. My current credit is $1.43 per contract for a total collection of $57,200 (1.43x100X400) This is a hedge against my long term portfolio holdings. The market MAY just go higher. It sure seems like it wants to shrug everything off right now.
The position only goes up in value if the market pulls back like 10% of more. My risk is if we get over SPY 360. I thought that was a very low risk at the time I put that hedge on and still think it’s a bit of a stretch, but boy it can feel uncomfortable. TOS is showing this position pricing about $3.07 so am down $65600 (-1.64x100x400) minus the original collection. So I am currently down around $65K in this hedge.
The math says that my statistical chance of 360 being in the money on Nov 20th is about %37. It was only about 6% when I first wrote this position.
This is the uncomfortable side of trading. I have committed enough capital to this hedge. I have no more plans on adding to the position. It’s a hedge. Let it protect my long term portfolio
This is a position for if things go really badly from here until and after the elections. Sold the November 20 SPY 360 CALLS for an average of 4.08 . I used that money to buy the November 20 270 SPY puts for an average of 3.68. I am keeping a net credit of .40 per position. I have 50 on right now. This gives me unlimited upside gain if the market REALLY crashes and my risk is if the S&P 500 gets over 3600 by that date. So about 250 handles higher from here, so I get PAID to put this position on in my account. It is a free hedge. It does tie up margin and I might buy the 375 calls if I can get them for under 40 cents a contract.
That was a pretty bullish recovery on Friday. Bears need to take 3190 to really change the market calculus. That level has been tested twice now and should fail on the next test. Bulls need to take the 3287ish area to prove they have the energy for higher. This is just consolidating until that happens.
ES Daily with comments
This an example of a diaper trade that would not have worked. Techniques do NOT work 100% of the time. Anyone that tells you differently is lying to you.
ES 5-minute chart
This is an update to this strategy analyzer report.
So I turned this on for a real market last Sunday and it took a $10,000 sim account down to a $4200 sim account in a week. I would call that a fail.
I expected this to happen. This was more of a lesson that you should be careful of people selling automated trading tools with only hypothetical results.
Not looking good for this bot. Three days out and has already lost $2400.
This is a strategy I once coded on a unirenko chart. This is plotted on the ES I had originally written this for CL but because IB does not backfil historical data, I have plotted this with the ES on the Pointanfigure chart
I do this is in my spare time I look at different chart types to see if something jumps outs at me and then see if I can code NT to be able to analyze if it would actually work. That way I don’t have to got back through years of charts manually.
This was the functionality test. Did this actually work and plot on a chart. If yes, move onto the Strategy Analyzer. That is this picture
This goes back to January 1, 2020 So about 6 months. 1.5million or so in 5 months. Now you are are excited. You have discovered the holy grail. You are going to be rich.
That is not how it works. Ninja-trader does a horrible job of back testing charts that are NOT time based.
However, it looks promising. Too promising to actual use.
So I have setup a dummy sim account in NT. I have called this BOT2 with a balance of 10,000.. I will run this for a week to see how it looks. Back testing showed it only had 3 losing days over 6 months (bullshit) so if I have more than 2 this week, this is a failed strategy.
Now if it works, then I could sell this bot. I would do that by first showing you the simulated performance report, a live performance report with real cash and then you would have data as to whether you wanted to buy it.
We will see how the week progresses.
Bot Balance $10,000
I had posted earlier how what I called the diaper trade on a 5 minute is one of my favorite trades. http://www.futuresradiolive.com/2020/02/09/diaper-trade/
This is a five minute ES chart going back about 24 hours from this post. See how these showed up and resolved. You only need one of these a day to make a living at this stuff.
So I put this hedge that I posted on earlier http://www.futuresradiolive.com/2020/02/10/possible-hedge/
To make this simple. I am going use a 10 option position to show how this worked and how I am managing the position
Sell 10 Mar 20 SPY 340 calls for $3.22 each. So you collect $3220. for that position.
10 x $3.22 x 100 =$3220.00
You use that money to BUT the SPY 318 put for the same day expiration Mar 20. Those cost $3.18 so you pay out $3180.00
10 x $3.18 x 100 = $3180.00
You netted $40 to put on a free hedge for market downside protection.. Your risk is if the S&P500 goes above 3400 by March 20th. You do tie up about $6,000 in margin with Interactive Brokers for each short call. You reward is unlimited via the long puts if the market really sells off.
The market was up around 3360 when I wrote this post and entered this position.
Now the market has been selling off. The DOW was down 1000 handles yesterday.
So I covered 1/2 that long put position yesterday. Again, for this math we will use 10 options.
Sell 5 of the long puts for $4.40 each. You collect $2200 for that sale.
5 X $4.444 x 100 = $2200
This is still let long 5 puts and so far you are up $2240 with this hedge. Remember you are net $40 when you started.
Use that money to by cheap out of the money calls above your short call SPY calls of 340. . For this example I will use the 352s Which were purchased at .04 or $40.00 This frees up most of the margin that was tied up on the original sell.
Buy 10 Mar 20 SPY 352 10 x $.04 x 100 = $40.00
The market “might” bounce. So using the remaining 5 puts. Sell high strike puts against those to turn those into a credit vertical to collect premium.
Sell 2 319 SPY Mar 20 puts for $4.89 and collect $978.00 This is a trade with a net MINIMUM profit of $778.00 The risk is the distance between the short and long strikes which is $1.00 or $100.
2 x $4.89 x 100 = $978.00
Buy in the short SPY MAR 340 calls above to .01 or $4 and release all of the margin. You can resell those later if the market makes a move higher. You still have 10 352 Mar 20 calls that you could sell calls against.
So now you have two, cannot lose put spreads short 319/long 318 for March 20 you still have three long puts at 318 which you purchased for free. So those will go up much higher if the market continues to sell off.
You have made $2200.00 with this trade. You have another, at least, $778.00 that you collect and maybe the full $978 if the market gets a bounce. You still have protection to the downside.
All the market geniuses seem to think we are do for a pullback. There are a lot of good reasons the market could or should go lower. You could use capital to buy SPY puts. This would give your portfolio downside protection.
You could also sell upside SPY calls and use the proceeds from that sale to buy puts. Essentially using the sale to give you the capital to do the buy.
Today you could sell the March 21 SPY 340 Calls for about 3.22 This is the equivalent of the S&P getting to 3400 by March 21. You could use that money to buy the SPY 318 Puts for 3.18. The next cost for this trade would be about $5.00 plus commissions.
The risk is if the market is sustained over 3400 plus the $5.00 cost of the position. The reward could be unlimited.
This is a hedge against a REAL market selloff. This would allow a trader to protect a long portfolio and allow themselves something in that portfolio that should go up in value IF the market has a real selloff.