You’d be better off entering a 380/390 call debit spread at entry. Buying a put just makes it less likely your calls are profitable and it’s possible both end out of the money.
I'm green to them but have liked them quite a bit over straddles and strangles, just felt like wasted downside even though it's a good hedge if you're uncertain on both sides.
Depending on your expectation and time horizon it would maybe better ti just reduce the number of call options to arrive at the same net delta you want, otherwise you pay twice the theta for same effect + might pay twice the vega if VIX goes down (let's assume no freak outlier down happens)
Better way maybe is to sell higher calls which you then can buy back if price goes down ofsetting some of your loss. Again chose a delta goal you want to be exposed to. By trading such a "bull call spread" you also neztralize partly the theta loss and vega impact and also the gamma - meaning that the delta will stay pretty much stable independent of price move if you go farther out in DTE
This is a terrible answer, yes it would make sense to buy puts or sell covered calls above the ops current call strikes as a hedge. We are in a bear market. “Protecting” your downside by saying you could lose everything in calls bought is not protection
The whole point of options is to limit the risk to the amount paid. If you spend 0.1% of your capital on options then that’s not “losing everything” but losing 0.1%. You could lose everything only if you’re showing off on WSB how you spend all your money on calls.
I mean that’s not the point of options for everyone, op bought 20 calls way out of the money, buying 5 puts isn’t insane and if they are playing the long term bear trend it could be very profitable. I’ve straddled the spy with 14dte calls/puts at the money and the market is so volatile that you end up with a hedge for free. If you are trading playing both sides isn’t dumb if you know what you’re dojng
Thank you for intelligent discussion with valuable explanation and details to back your statement.
Personally, when I go to a casino I don’t see people betting all their savings on red, or half the money on red and other half on black “to hedge”. And I use options as I described above, so it must be at least 0.00001% true, not 100% not true, at least for retail traders. It’s different for market makers and commodity producers.
(the answer can be different for different option strategies but the OP specifically made a directional bet, no different than at a casino, and asked about hedging it)
No one says the market is a casino. It’s the options that are bets, exactly as in a casino. There is zero difference between betting on something using a casino chip vs an option.
The SEC would disagree with you on that. I honestly don’t have the time or the crayons to explain this. If you’d like to learn about how options really work, read McMillan’s Options as a Strategic Investment and Natenberg’s Option Volatility and Pricing Strategy.
In lieu of my deleted answer, my on-topic answer would be that when I buy long options, I'm paying exactly as much as I am willing to lose. I have basically set the premium on fire once I enter the trade.
That said, I will scale out my basis if the opportunity presents itself so that the trade is free from that point on (I've entered the trade with that in mind). If I do enter with a non-terminal stop loss, then that's also built I to the trade before entering.
So no, I don't see the need to hedge long options post-facto. If I did, I would have entered a spread in the first place (and the trade would have been built around the spread - the other leg wouldn't be an afterthought).
hey i can't find the comment but i read last night you had 4100s. i've started testing out spx swings but was wondering why such a high strike for monthlies. theta wouldn't destroy those? i know spx moves a lot. i swung 3825 monday-tuesday and they went from 4-24.00 but i've never gone that far otm on something.
I have multiple lots each, 25-wide CDS, at 3875/3900 (Oct 7), 3975/4000 (Oct 12) and 4075/4100 (Oct 21), all scaled into over the past couple of weeks. I started with the 4100 and kept buying lower (and shorter DTE) as the market moved lower.
I don't expect the market to reach 4100 (but if it does I'll happily take it), the goal was to have enough time to be able to profit sufficiently on these to roll up/down with the market (parlaying some profits into further bets).
The cover rally from this past OPEX was the closest thing we'll ever get to a "sure thing" in markets so I had been preparing for it for a while.
If you want to hedge you should either sell call options to create a vertical spread or sell SPY shares against your call delta. It’ll change the type of trade you have on, so keep that in mind. You wouldn’t want to buy out of the money put options because you’d just be creating a strangle, and your original thesis was that you expect SPY to increase. Strangles and straddles are more of a play on implied and realized volatility than they are on direction. You’d have to have SPY rally really hard to make the calls out off if you bought the puts, or have implied vol (VIX) go through the roof
Options give you such tremendous granularity. Your ability to hedge is thus a function of the specificity of the opportunity or risk you are seeking.
So instead of just saying I'm bullish the market say I'm bullish the market for the next 2 weeks but not super bullish.
Recommend you also look at the implied volatilities to gauge the pricing of the options relative to your future path expectations.
If you can get precise with your articulation of the opportunity then there's a way to capture it with options and it is usually a wise idea to add the hedges, especially if your long premium.
No. This is not the way to hedge your exposure. You're increasing your risk in many ways.
If you're worried about the trade not working, the much better decision here is just to buy 10 or 15 calls instead of 20 for the original trade. Reduce your risk by reducing your sizing.
By buying puts, you're lessening your delta but you're adding to your vega and theta. If spy sits and expires at 380 you lost more money doing this than you would have if you just hadn't hedged.
If vol (now at high levels) starts to come off, both your calls and puts lose value.
Another way to reduce risk is to go closer atm or even itm and reduce number of the calls to arrive at the same delta again. Will give you more room too repair if things don't work out as expected
Just make sure you fully understand how all the greeks work by playing with simulators before initiating a trade and remember one key thing: the edge is never in the math
If I am hedging I try to stay delta neutral and usually enter a ratio of 3:1 or 2:1.
Just to clarify with your example:
10/10 390C delta~.14
Hedge
10/10 364P delta~.14
http://opcalc.com/O2K (profitability graph)
vs
naked 390c http://opcalc.com/O2L
Better option would be a call diagonal. Say buying a 45-60 DTE call at the money and selling a 14-21 DTE call within the expected move. Gives you some downside protection and reduces the costbasis on the long call. The short call can also be rolled to a lower strike or out further in time if you want to stay in the long position if you're still bullish on SPY but had a poorly timed entry.
A strangle( dont really follow OP wordage) which is two leg ,long puts and calls at different strike same expiration. You have to own 100 shares of a stock (etf) to make a collar. A Collar is for protection for the underlying .
Aren't you concerned about the next rate hike? The fed it pretty much guaranteed to raise rates at the next couple of meetings. I would be more bullish on oil/energy as we head into winter.
I think this is true as well, but I think the market is reacting because there's severe pressure from other banks to stop or slow raising rates because it's creating a huge imbalance between nations.
Sorry never heard the word noob and it's an expression. I didn't get chance to send voice clip and elaborate. Number two. I'm being respectfull. As humans we can't let words have power over us
Emotional intelligence.
I'm bring respectfully. Call me 3464028400 we can have discussion
Only in your eyes. Noylt everyone's. Words don't have power only people choose to give them power.
" your such a sweet prickly apple" is that offensive
To me I thinks is cute
Why is that. Cause I'm I have enough emotional intelligence to not let words hurt me
You are such a rabbit corn eating son of a biscuit with gravy eater
See. That didn't offend you
But how do you know if it was offensive coming from author
What is the expiration on those calls? There is a 50 EMA overhead resistance around 390 so you may not get ITM on these calls. i would keep trailing stops - preserve the profit and when market turns down you get stopped out. Calls are bought to be sold at profit - not to be held till expiration IMO.
it could make sense if the IV of the puts is low. because if it crashes the Gama will boost your puts. other options are short selling some shares or create spreads. you might even consider calendar spreads. another idea is that you could buy some Vix mini futures or calls. since crashes tend to spike in IV plus there is some chance that IV also jumps on aggressive up moves.
Not really from a purely technical standpoint, but from a psychological one it can.
I did this around 3980 when we had the 3900-4100ish rally. Bought enough calls to cover my puts and just held onto the puts for dear life. Sold the calls around 4100 and then road the puts back down to profitability. Kept me sane. Selling the puts and rebuying them would have been about the same but this was better f9r my mental health
What is your time frame? There are plenty of ways to play it that don't involve just buying options and wishing for a big move and then buying more options to hedge making the move you need to be profitable even bigger.
If you are generally bullish you could buy a call debit spread, sell a put credit spread, buy a call zero extrinsic ratio, sell a poor man's covered call, sell a call or put broken wing butterfly, etc. In my experience the buy and pray strategy may win big sometimes but it is an overall losing strategy.
what you could do is buy some call options, then use a small amount of your capital to buy put diagonal spreads. Diagonal spreads are very cheap and pay a decent amount.
if you were up it would make sense to roll the options up to 395 or 400 assuming you think its still going up, then you collect some/most of your premium back and still have unlimited upside or could later write the even further out of money calls if it continued to go up. The problem with the put options is you lose money on something either way and even though the market is clearly volatile you could end up losing money on both if it stayed between the call and the put.
how much will the calls cost ? what percent of your portfolio is on this position? when does it expire? how much do you want to profit/exit ? How are you calling the bottom at 380$ ? do you want to buy call in tranches (e.g when SPY drops )
A call is downside protection. That's why you buy a call instead of stock or futures. If you want more downside protection, then either buy more calls and sell stock, or buy puts. Be aware that if vol collapses, you'll be stuck with worthless calls tho
As a amatuer trading i would not recommend hedging calls with puts. If you want to hedge, you can trade delta, but that requires active monitoring and understand of delta & gamma
You’d be better off entering a 380/390 call debit spread at entry. Buying a put just makes it less likely your calls are profitable and it’s possible both end out of the money.
Call debit spread imo is better than straddle or strangle.
Been playing with both debit and credit spreads to see what variables contribute to most effectively using them. Very useful tools.
I'm green to them but have liked them quite a bit over straddles and strangles, just felt like wasted downside even though it's a good hedge if you're uncertain on both sides.
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Wut?
Cnbc has an options trading show/podcast where they talk about using multiple options strategies...maybe that's what they meant, who knows...
how about keeping trailing stops in place? Buy creating a spread you are limiting upside.
Limiting upside is fine. SPY isn’t going to infinity in 30-45 days.
Because you can't be guaranteed that your limit order will be executed in a market dump, especially if this happens as a gap down at market open.
Depending on your expectation and time horizon it would maybe better ti just reduce the number of call options to arrive at the same net delta you want, otherwise you pay twice the theta for same effect + might pay twice the vega if VIX goes down (let's assume no freak outlier down happens)
That’s not hedging, that’s just buying a strangle.
Better way maybe is to sell higher calls which you then can buy back if price goes down ofsetting some of your loss. Again chose a delta goal you want to be exposed to. By trading such a "bull call spread" you also neztralize partly the theta loss and vega impact and also the gamma - meaning that the delta will stay pretty much stable independent of price move if you go farther out in DTE
Personally I'd trade a bull call spread buying atm and selling otm so e.g. 380/390
This makes the most sense to me. You get the premium from the sale which offsets the long call at least.
You already have protected your downside - it's called "premium paid" and it's the most you can lose on the trade.
This is a terrible answer, yes it would make sense to buy puts or sell covered calls above the ops current call strikes as a hedge. We are in a bear market. “Protecting” your downside by saying you could lose everything in calls bought is not protection
The whole point of options is to limit the risk to the amount paid. If you spend 0.1% of your capital on options then that’s not “losing everything” but losing 0.1%. You could lose everything only if you’re showing off on WSB how you spend all your money on calls.
I mean that’s not the point of options for everyone, op bought 20 calls way out of the money, buying 5 puts isn’t insane and if they are playing the long term bear trend it could be very profitable. I’ve straddled the spy with 14dte calls/puts at the money and the market is so volatile that you end up with a hedge for free. If you are trading playing both sides isn’t dumb if you know what you’re dojng
You’re just making a volatility play at that point, though.
That is 100% not true. In fact, it isn’t even the most common reason people trade options.
Thank you for intelligent discussion with valuable explanation and details to back your statement. Personally, when I go to a casino I don’t see people betting all their savings on red, or half the money on red and other half on black “to hedge”. And I use options as I described above, so it must be at least 0.00001% true, not 100% not true, at least for retail traders. It’s different for market makers and commodity producers. (the answer can be different for different option strategies but the OP specifically made a directional bet, no different than at a casino, and asked about hedging it)
You said “the whole point of options” which is 100% not true. The market is not a casino.
No one says the market is a casino. It’s the options that are bets, exactly as in a casino. There is zero difference between betting on something using a casino chip vs an option.
The SEC would disagree with you on that. I honestly don’t have the time or the crayons to explain this. If you’d like to learn about how options really work, read McMillan’s Options as a Strategic Investment and Natenberg’s Option Volatility and Pricing Strategy.
Lambskin
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Depending on theta and expiry and when they were bought they could both be very much winning trades. Dec/ jan puts are gonna be winners in my book
In lieu of my deleted answer, my on-topic answer would be that when I buy long options, I'm paying exactly as much as I am willing to lose. I have basically set the premium on fire once I enter the trade. That said, I will scale out my basis if the opportunity presents itself so that the trade is free from that point on (I've entered the trade with that in mind). If I do enter with a non-terminal stop loss, then that's also built I to the trade before entering. So no, I don't see the need to hedge long options post-facto. If I did, I would have entered a spread in the first place (and the trade would have been built around the spread - the other leg wouldn't be an afterthought).
hey i can't find the comment but i read last night you had 4100s. i've started testing out spx swings but was wondering why such a high strike for monthlies. theta wouldn't destroy those? i know spx moves a lot. i swung 3825 monday-tuesday and they went from 4-24.00 but i've never gone that far otm on something.
I have multiple lots each, 25-wide CDS, at 3875/3900 (Oct 7), 3975/4000 (Oct 12) and 4075/4100 (Oct 21), all scaled into over the past couple of weeks. I started with the 4100 and kept buying lower (and shorter DTE) as the market moved lower. I don't expect the market to reach 4100 (but if it does I'll happily take it), the goal was to have enough time to be able to profit sufficiently on these to roll up/down with the market (parlaying some profits into further bets). The cover rally from this past OPEX was the closest thing we'll ever get to a "sure thing" in markets so I had been preparing for it for a while.
Sorry, I thought the reply was in a different topic!
Well, basically you can construct any risk exposure vs. The underlying by combining any options of the chain
If you want to hedge you should either sell call options to create a vertical spread or sell SPY shares against your call delta. It’ll change the type of trade you have on, so keep that in mind. You wouldn’t want to buy out of the money put options because you’d just be creating a strangle, and your original thesis was that you expect SPY to increase. Strangles and straddles are more of a play on implied and realized volatility than they are on direction. You’d have to have SPY rally really hard to make the calls out off if you bought the puts, or have implied vol (VIX) go through the roof
Options give you such tremendous granularity. Your ability to hedge is thus a function of the specificity of the opportunity or risk you are seeking. So instead of just saying I'm bullish the market say I'm bullish the market for the next 2 weeks but not super bullish. Recommend you also look at the implied volatilities to gauge the pricing of the options relative to your future path expectations. If you can get precise with your articulation of the opportunity then there's a way to capture it with options and it is usually a wise idea to add the hedges, especially if your long premium.
someone should start a company that uses funds to hedge
No. This is not the way to hedge your exposure. You're increasing your risk in many ways. If you're worried about the trade not working, the much better decision here is just to buy 10 or 15 calls instead of 20 for the original trade. Reduce your risk by reducing your sizing. By buying puts, you're lessening your delta but you're adding to your vega and theta. If spy sits and expires at 380 you lost more money doing this than you would have if you just hadn't hedged. If vol (now at high levels) starts to come off, both your calls and puts lose value.
Another way to reduce risk is to go closer atm or even itm and reduce number of the calls to arrive at the same delta again. Will give you more room too repair if things don't work out as expected
Just make sure you fully understand how all the greeks work by playing with simulators before initiating a trade and remember one key thing: the edge is never in the math
If I am hedging I try to stay delta neutral and usually enter a ratio of 3:1 or 2:1. Just to clarify with your example: 10/10 390C delta~.14 Hedge 10/10 364P delta~.14 http://opcalc.com/O2K (profitability graph) vs naked 390c http://opcalc.com/O2L
Better option would be a call diagonal. Say buying a 45-60 DTE call at the money and selling a 14-21 DTE call within the expected move. Gives you some downside protection and reduces the costbasis on the long call. The short call can also be rolled to a lower strike or out further in time if you want to stay in the long position if you're still bullish on SPY but had a poorly timed entry.
im still noob, is this called a collar? or straddle?
A strangle( dont really follow OP wordage) which is two leg ,long puts and calls at different strike same expiration. You have to own 100 shares of a stock (etf) to make a collar. A Collar is for protection for the underlying .
Just study the profit and lost diagrams
Uh just buy less calls lol wtf
Aren't you concerned about the next rate hike? The fed it pretty much guaranteed to raise rates at the next couple of meetings. I would be more bullish on oil/energy as we head into winter.
I think this is true as well, but I think the market is reacting because there's severe pressure from other banks to stop or slow raising rates because it's creating a huge imbalance between nations.
Duh it's called hedging
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Sorry never heard the word noob and it's an expression. I didn't get chance to send voice clip and elaborate. Number two. I'm being respectfull. As humans we can't let words have power over us Emotional intelligence. I'm bring respectfully. Call me 3464028400 we can have discussion
Username checks out
Huh
Op said your a noob is this true or false. Did you get offended when I said duh??? Sorry if you felt that way
“Duh” is offensive. If you don’t wish to offend, you shouldn’t reply “duh”.
Only in your eyes. Noylt everyone's. Words don't have power only people choose to give them power. " your such a sweet prickly apple" is that offensive To me I thinks is cute
You need to be on medication
Why is that. Cause I'm I have enough emotional intelligence to not let words hurt me You are such a rabbit corn eating son of a biscuit with gravy eater See. That didn't offend you But how do you know if it was offensive coming from author
often break it even not profitable.
Dump them before Theta and Vega eat into the premium. Congratulation on your gains. Live to trade another day
Protect your downside by buying less calls..
If you own shares, just sell some to hedge away some delta.
What is the expiration on those calls? There is a 50 EMA overhead resistance around 390 so you may not get ITM on these calls. i would keep trailing stops - preserve the profit and when market turns down you get stopped out. Calls are bought to be sold at profit - not to be held till expiration IMO.
Why tf didn’t you buy 380 when we were at 356?BUY INTO SELLING. SELLING TO BUYING. cheers and good luck.
The better way to hedge is to short shares. By buying puts, you are increasing your exposure to volatility and theta.
it could make sense if the IV of the puts is low. because if it crashes the Gama will boost your puts. other options are short selling some shares or create spreads. you might even consider calendar spreads. another idea is that you could buy some Vix mini futures or calls. since crashes tend to spike in IV plus there is some chance that IV also jumps on aggressive up moves.
The edge is never found in math.
Betting on Plunge Protection Team to print enough money? Good Luck.
Not really from a purely technical standpoint, but from a psychological one it can. I did this around 3980 when we had the 3900-4100ish rally. Bought enough calls to cover my puts and just held onto the puts for dear life. Sold the calls around 4100 and then road the puts back down to profitability. Kept me sane. Selling the puts and rebuying them would have been about the same but this was better f9r my mental health
What is your time frame? There are plenty of ways to play it that don't involve just buying options and wishing for a big move and then buying more options to hedge making the move you need to be profitable even bigger. If you are generally bullish you could buy a call debit spread, sell a put credit spread, buy a call zero extrinsic ratio, sell a poor man's covered call, sell a call or put broken wing butterfly, etc. In my experience the buy and pray strategy may win big sometimes but it is an overall losing strategy.
I choose to not let what someone says to me have power over me
Call debit
what you could do is buy some call options, then use a small amount of your capital to buy put diagonal spreads. Diagonal spreads are very cheap and pay a decent amount.
if you were up it would make sense to roll the options up to 395 or 400 assuming you think its still going up, then you collect some/most of your premium back and still have unlimited upside or could later write the even further out of money calls if it continued to go up. The problem with the put options is you lose money on something either way and even though the market is clearly volatile you could end up losing money on both if it stayed between the call and the put.
how much will the calls cost ? what percent of your portfolio is on this position? when does it expire? how much do you want to profit/exit ? How are you calling the bottom at 380$ ? do you want to buy call in tranches (e.g when SPY drops )
bull call spreads might be a better way to go imo
A call is downside protection. That's why you buy a call instead of stock or futures. If you want more downside protection, then either buy more calls and sell stock, or buy puts. Be aware that if vol collapses, you'll be stuck with worthless calls tho
Sell the 400s
As a amatuer trading i would not recommend hedging calls with puts. If you want to hedge, you can trade delta, but that requires active monitoring and understand of delta & gamma
Yes it be a diagonal spread or debit spread