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Ben, thanks for describing your hedging strategy. My
comments/questions are interspersed below:
On Jan 28, 3:22pm, Proffittak@xxxxxxx wrote:
>
> At roll over time (Dec. contract to the March contract) I
> bought 4 SP 4 ND 4 nyfe and 4 DJ at that time, The Dec. SP
> was at 1300 (aprox) I sold 24 1400 March calls and bought
> 16 Jan 1275 puts.
If you want to be long the market, why did you buy SP's,
ND's, NYFE's and DJ's? Although due to volatility and
differences in per point price move, one ND may be
more/less equivalent to an SP, and likewise the NYFE,
the DJ future is probably about 1/3 the size of the SP.
Perhaps this nets out to being long 16 SP futures after
accouting for differing volatilities and per point price
moves, but why get so complicated? Why not cut back to
say, 8 SP's and 8 ND's and sell SP options against the
SP's and ND options against the ND's? That way, you
don't have to worry about the differing volatilties.
> When SP reached 1350, I sold the Jan 1275
> puts and bought the Feb 1325 puts. Also bought at a loss
> the March 1400 calls. and replace them with March 1450
> calls(24).
Using http://www.pmpublishing.com/volatility/sp.html as a
reference, the SP future closed at 1366.50. 25 points
below that would be the Feb. 1340 puts, and 100 points above
would be the Mar. 1465 calls.
long Feb 1340 puts: 22.00 delta: -0.34
short Mar 1460 calls: 9.00 delta: -0.18
-----------------------------------------
debit -13.00 delta: -0.52
long future delta: 1.00
--------------
position delta: +0.48
Initially, this hypothetical position would have a delta
of about 0.48, so the position is equivalent to being long
about half an SP contract.
If the SP closes below 1340 by March expiration, the position
loses 13 (initial debit) plus 26 points (distance between
current price and 1340 strike on puts), or 39 points,
worst case.
As a ballpark, I used monthly SPY data going back to 1993
to calculate a likely percent change distribution for the
S&P, assuming the bull market stays mainly in tact
(a fudge factor was subtracted out to account for
the S&P premium).
Freq. %-monthly change
0% -14.50
10% -2.94
20% -1.45
30% 0.46
40% 1.21
50% 2.32
60% 3.14
70% 3.80
80% 5.33
90% 7.55
100% 7.73
At current prices, 100 points out of the money is about 7.3%. Using
the table above the chances of the short calls going in the moeny
is about 10%, and the downside is limited to about 15 SP points,
which is more than made up by a 100 point move in the SP.
As you mention, in that scenario, you're probably out about
25 points, but made 75, so this is okay.
The typical case (in this multi-year bull market is a 2.3%
monthly move, or about 30 SP points. Assuming 50/50 odds
of picking the direction correctly, the expected profit
is 30 - 13, or about 17 S&P points/month, which is
probably about 100% return on margin. Not too shabby.
However, if the market goes sideways for a while, you're
out 13/month, and worst case you're out 39 points for
a few of those months if the market sells off.
The strategy you're using is a good one in the current
market environment, but seems to depend fairly strongly on
the bull market staying in gear.
Something else to consider, might be to sell a put backspread
against the long future. At current prices, the Mar. 1365
put is 45.00 and the Mar. 1290 put is 21.70. You can sell
one 1365 put (at the money) and use the proceeds to buy two 1290
puts. The put spread position is pretty close to delta neutral
initialy, so your total position is effectively long 1 SP
contract.
The long future, and put backspread position will make
money above 1366 and below 1290, if held until March
expiration.
The downside is limited to 76 S&P points, which is just
about the full S&P margin. However, the insurance is
"free" as long as you can collect a small credit when
initiating the position. You can still use stops on the
S&P to limit downside, and reverse to short if required, in
Globex, if needed. You'll need to roll the options
up/down as the market moves.
Combining the put backspread with a long future might be
one method to keep from getting hit by an overnight major
limit down move, or at least limit the damage of any major
spike down, and to still participate in the full upside gain.
>
> PS: If credit collected from selling calls is not enough to
> pay for puts, I just sell more calls at 110 points above
> instead of 100 above.
Those 110 point out-of-the-money calls are being sold
naked. Although the odds are low that they'll ever get
hit, I'm not sure that the small premium is worth the
additional risk.
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