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 $65K in this hedge.
The math says that my statistical chance of 360 being in the money on Nov 20th is about %37. It was only about 6% when I first wrote this position.
This is the uncomfortable side of trading. I have committed enough capital to this hedge. I have no more plans on adding to the position. It’s a hedge. Let it protect my long term portfolio
My current average on my hedge is 4.35 on the calls with 150 contracts on each side and 3.55 on the puts for a combined net credit of +$.80 per position or $12,000
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.
Futures homework for the S&P 500 futures
Talk about a bull market. Bears need to get this 60 handles below to 3287ish for a “hope” of taking it lower. Everything is overbought. All sorts of valid reasons this should be lower. A good indication of a trend is how far apart are the moving averages in the time frame you are researching. The the 20, 50 and 200 on the daily and all sloping up and opening farther apart. You could probably scalp any one of those averages with success
The 4 hour seems to offer a probable location for a possible chance at a short in the 3400 area.
This would be a great time to see if you could put on a free hedge out to post election in November. Selling like a SPY 360 or 370 call and seeing if that would give you enough money to put or get a credit for a put of the same expire. Like a 280 or 300. It might now work but would give protection to the downside. Similar to this trade that I put on and advised about in February of this year.
This is the inverse of the short hedge. I get unlimited up side out to May
Sell the May 15 188 Put for 6.60 or $660 per contract. Use that money to BUY the May 15 291 call for 6.50 or $650 per contact for a net credit of $10 per contract. Your risk is if the S&P gets down to 1880 in which case you would have to buy 100 shares of the SPY at 188 or 25% lower than we are now. I am perfectly content to own the spy at 188
You have unlimited upside and will peel off the long calls as they gain in value. I currently have 80 of these positions on right now
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.
I sold another 3350/45 put spread for Friday for .45 to help the cost basis on my upside down 3350/55 Mar 31 call spread. Sunday I will write a little article about managing upside down options.
Thursday. Look for a low in the ES in the morning with a grind higher in the afternoon
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.