Re: [SuperTraderKarenStudy] Re: Using VXX or VIX as a hedge.


Apr 15, 2014

 


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#693 Apr 15, 2014

Buying a Put Calendar further out of money (do not know how much OTM) might be a way to hedge on the down side. The value of the Put Calendar will go up if the Volatility goes up.�� Basically short the same month as the Short Put (or Put Spread) and buy the next month Put of the same strike price. Use up to about 10-20% of the premium you receive from the Puts and the Calls you have sold for that time period.�� You will not profit, but getting out of the position will become less painful.

I certainly would like to explore the VXX or VIX as a hedge.

Atul





From: "matthewmccabe@..." matthewmccabe@...> To: supertraderkarenstudy@yahoogroups.com Sent: Tuesday, April 15, 2014 8:56 PM Subject: [SuperTraderKarenStudy] Using VXX or VIX as a hedge.

��Has anyone experimented with using a volatility instrument as a hedge for this strategy?

The main fear anyone has with this is a catastrophic unseen market event. ��While I feel the strategy does an excellent job of assuming the worst from the start, like we all know, there is a reason why there is even premium to sell that far out of the money to begin with. ��Its that great big "what if." ��In my mind finding a cheap way to add a volatility leg will help everyone trade greater size and keep the fear of blowing up an account at bay. ��Karen may have a 25-50 million dollar cushion to adjust on major events but most of us do not and a 15% market move will wipe out years of gains for a lot of people especially if they continue to scale up.



If we look at XIV on the flash crash day, it moved uproughly 60% while the S&P fell about 10%. Obviously a 1 for 1 hedge isn't needed but perhaps something like 1 for 5 just to help everyone sleep at night if the unseen happens.��

Basically what I'd like to talk about is figuring how the cheapest way to build a hedge. ��It may be that selling a put and a call OTM and buying multiple calls much higher may be the best strategy. ��Anyway I'm open to any ideas. ��

Thanks guys. ��I'm new here and look forward to sharing and listening to ideas.



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#695 Apr 15, 2014

Atul,.

My understanding of calendar spread is that it is used for market neutral strategies. Clndr spreads will benefit from increase in volatility but will incur loss in case of huge change in the underlying price. Correct me if I'm wrong.

/prax



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#696 Apr 16, 2014

Prakash,

I looked at the risk profile for a Jun/Jul 14 1700 Put Calendar in TOS:

+1 Jul 14 SPX 1700 Put, -1 Jun 14 SPX 1700 Put - Cost 6.35, Max Profit $2763 if SPX were to close at 1700 on Jun 14 expiration, Breakeven range 1612-1795 for the Calendar Spread.

Now if I increased the Vol by +100% (which is what I would expect in case of a huge down day - black swan type of event) and then the MAx profit is $21,200 and the break even range is very wide - 956 to 3283.

This is�� due to the larger time value left in the long Put of the calendar and the 100% increase in Vol, the value of the Long Put goes up much more than the short Put, hence such an increase in value.��

As I noted, one could use this as a hedge, the strike would be past your short Put SPX positionand the amount of insurance you want to buy is up to you.

I am thinking that one could spend about 10-20% of the premium received on insurance (hedge).�� The question is what is the best way to hedge against a black swan event.

I hope someone in the group can put out a good example;�� I am also working on it, I will post once I have it figured out.

ThanksAtul

From: Prakash Shenoy pbs141@...> To: supertraderkarenstudy@yahoogroups.com Sent: Tuesday, April 15, 2014 11:28 PM Subject: Re:[SuperTraderKarenStudy] Re: Using VXX or VIX as a hedge.

��Atul,��

My understanding of calendar spread is that it is used for market neutral strategies. Clndr spreads will benefit from increase in volatility but will incur loss in case of huge change in the underlying price. Correct me if I'm wrong.

/prax



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