SPY: Overnight Black Swan Waiting Time?

Discussion in 'General Discussion' started by Ice101781, Apr 1, 2017.


How long do you think it will be before the next ~9%+ opening gap-down?

  1. 6 Months

    6 vote(s)
  2. 1 Year

    5 vote(s)
  3. 2 Years

    6 vote(s)
  4. 3 Years

    4 vote(s)
  5. 4 Years+

    10 vote(s)
  1. Kevin Lee

    Kevin Lee Well-Known Member

    This is a good chart. It does show an important point - it's not the absolute movement that matters but rather how much were you paid when you entered the position vs actual market movement that's important.
    Paul Demers and Ice101781 like this.
  2. Ice101781

    Ice101781 Guest

  3. johnyoga

    johnyoga Member

    For now, I am with you.

    I lost more on using Backspreads as hedges versus simply buying near the money, very short-term SPY Long Puts.

    The Backspreads often "dip" well ahead of the sea of death area, and that is where I get stung...even if I put on/take off in a week or so's time. This could be a function of a constantly rising market, as the IV keeps dropping. The SPY close-in Long Put gives you a much bigger profit, close to the money, whereas the Backspread doesn't.

    Yes, the Long Put scheme costs you more.

    Perhaps when the market starts changing direction, a Put Diagonalized Ratio Spread would be best. But, for now, the Teeny seems like the simple and effective way to go.
    Ice101781 likes this.
  4. Ice101781

    Ice101781 Guest

    These days, it makes sense to me to focus on short-DTE downside protection when hedging my longer-term income structures. First, it minimizes initial costs. Second, OTM puts cling to premium near expiration. Third, by that point term-structure decay has likely steepened the skew from where it was further out in time, so there's relative value on OTM put debit spreads. Fourth, these types of debit spreads will be much more sensitive to changes in the VIX than will the later-dated income trades - which means higher-powered Vega and Vomma.

    The guy who sold it to you might be an income trader - that dip is his profit hill. The skew favors sellers of backspreads.
  5. Ice101781

    Ice101781 Guest

    Yeah, maybe in a high-vol environment - would be interesting to research.
  6. Marcas

    Marcas Well-Known Member

    I hear you.
    Just out of curiosity: are you running your hedges in systematic way or is it more discretionary thing.
  7. johnyoga

    johnyoga Member

    Ice, if you don't mind me answering this one (too)...

    Marcas, what I do is very simple: I go to the Analyze tab in ToS, bring up the Portfolio view, toggle on/off different SPY short-term DTE, close to the money Long Puts, both with/without the Put Skew IV value change (Vol Step +4 set to 10), and see what level hedging and Long Put cost I am happy with, then place the trade. The IV Skew can be found at the bottom of the Trade tab, called "Product Depth".

    Take careful note of the SPY Put pricing the further out in time you go. It is not linear; you do NOT get the better price/day going further out in time. You'll see jumps in cost. Play with it; you will see what I mean.

    This simple, cheap hedging with these Long Put weeklies is very effective on my end, I think because I don't have my structures on top of/near ATM. Depending on my DTE initiation of a structure (I time layer), a structure's T0 doesn't go to BE until 5% - 25% down or so. Therefore, cheapo SPY Long Puts have a long take off distance before their hedging is needed. Of course, the added positive Vega is a nice touch. ;)
  8. Ice101781

    Ice101781 Guest

    I like the idea of systematic hedging. My current income campaign (Dec) was initiated alongside an A:B:C ratio of VIX calls across the term structure (Oct, Nov, Dec). I'm finding that even at these rock-bottom levels, the cost-of-carry (contango loss) is still just too high and it's been a real drag. In the next cycle (Jan), I plan to use an estimate of my expected profits after 30 days in the trade as a baseline for sizing the downside hedge. For example, if I expect 30-day profits to be $1.5k, then I'll probably spend no more than $150 (10%) on protection for the first month of the campaign, when the structure is most vulnerable.

    The design of the hedge will be different as well. Instead of a ratio of VIX calls across expirys, I'll look for a 30-day OTM put debit spread in SPX (income structure is /ES, but size is bigger, commissions are cheaper, and liquidity is better in SPX) trading for .90 to a buck. I'll spend the remaining .50 on a single 30-day VIX call. I like the idea of a mix better, and I like the idea of a naked long in the VIX much better than spreading it off - reason being, I think the VIX may be particularly vulnerable to explosive behavior due to all the short-vol trading, and if so, I don't want to cap gains.
    Chaitanya likes this.
  9. Marcas

    Marcas Well-Known Member

    Thanks for input. I like both ways of hedging they seem to be worth of time to explore in future.
    Johnyoga: do you have your SPY puts all the time or maybe you just increase size in expected danger? I also trade far OTM but try to hedge in the same instrument (SPX) - mostly for simplicity. Did you calculate long term cost of this method? I assume you are buying 40-60 cents for 10% Gap.

    Ice101781: I like 10% approach but I see danger here. 10% is pretty easy to track and it is darn good ratio but will it perform when needed. I'm speculating. You should have decent results long term but also bigger drowdowns (if 10% hedge is less efficient). Are you trying to recover costs after first month?
    I run hedge all the time and so far it has been significant drag on my P/L. I will be working on this issue when I finish my pending study but for now I'm leaning toward setting hedges more discretionary way. Unanswered question is: am I willing to take the risk.
  10. Marcas

    Marcas Well-Known Member

    To clarify, quote from today's Zerohedge's post (how timely):
    "(...) approach to calculating risk failed to take into account the possibility of >>six sigma<< [event]"
  11. johnyoga

    johnyoga Member


    First of all, and before I forget again: I enjoy the dialog occurring in this thread. What a wonderful group of folks here!

    Hedging in the same instrument is fine of course, and certainly makes the process a pinch simpler. For me, I like to fine tune my hedging, and SPX doesn't do that for me, but the SPY does. I enjoy the tighter spreads, and more expiries to choose from. I appreciate how the Long Puts help out almost immediately to the downside, and certainly cures the potential losses from some of my structures that break below BE at 7% - ish.

    Expecting Danger. There are studies at the CBOE website that show when the VIX is under 15 or over 50 you do not hedge. You hedge with 0.5% of your portfolio value using 25% OTM VIX Calls when the VIX is between 15 - 30, and when the VIX is between 30 -50, you hedge with 1%. Translate that to what you are asking: Supposedly, if you see the VIX below 15 or above 50 you do not hedge at all (no VIX; no Long Puts); it's only when the VIX is between 15 - 50 that you do so. But, this study is not speaking to unexpected, out-of-the-blue, Black Swan events. A Black Swan by its very definition, are unexpected. Therefore, on my end, at least, I try to keep the discipline of having a hedge on at all times. Imagine kicking yourself for not placing at least a minor hedge that costs you a cup of Starbucks coffee?
    Mark17 likes this.
  12. Marcas

    Marcas Well-Known Member

    I see that many of us struggle with similar problems. Unfortunately no universal solution exists. I have no experience with SPY but I will look at SPY long puts (typically it will be short term loss, nespa?). I have very reserved approach to financial studies especially when some aspects are obscure to me, in this case I probably wouldn't drop hedges below 15 but rather loosen them, well depends on actual position...
    You're right, there are much valuable information here.
  13. Mark17

    Mark17 Well-Known Member

    Do you have a link to that study?

    I agree with Marcas here: no universal solution exists. I even question whether it's worth trying to backtest because so few significant market crashes/corrections exist. Maybe you put these hedges on and just assume to lose in every case (but will be rewarded when a crash happens).

    Ice101781--if you take 10% of a monthly income trade and allocate that to weekly hedges then can you really get any protection? I can better see taking 10% of that and allocating them to monthly hedges but I also find the idea of shorter-term hedges to be interesting.
  14. Ice101781

    Ice101781 Guest

    Sure, I'd like to recover the hedging costs in the first month (i.e., in the form of out-sized gains), but my expectation is to earn the 30-day simulated profits less the hedging costs. I'm willing to lose that money - instead, the focus will be on spending no more than 10% for as much protection as possible, using skew to maximize my edge. The idea is to not have to worry about managing losses on those debits.

    I think the answer to this question is highly dependent on your trade structure/parameters, but in my case, income trades are being initiated with ~90 DTE and going forward, the hedges will be opened on the same day with ~30 DTE. Again, how much protection you can get for 10% will vary, but I'm satisfied with what I've seen so far.
    Mark17 likes this.
  15. johnyoga

    johnyoga Member

    I have this on my PC desktop. I look at this every so often. This, and I remember the day when the three of us traders were Skyping on an expiration day in October ("years back") when one of them lost half of his account...he was in a shit-ton of Iron Condors. That day screwed him up for years...these are reminders to not be complacent and have portfolio hedging on at all times, and not wrap my trades around or near the axle...
  16. johnyoga

    johnyoga Member

    With your comments: It depends on when you start, now doesn't it?
    If a person gets hit with losing half or more than half of their account when beginning a delta neutral strategy, it will take 100% (or more) to recoup. The person and his account are already damaged. Unless a person has a large bank, many will be "in" with at least 30% of their bank at one time.

    To folks here that have not even been through at least one major crash (via strong, spiky down moves) and/or Black Swan, rationalizing what you will do when it happens is far different than having it happen, or seeing someone you know have it happen to them...it is no longer an academic/rational decision/exercise. The spreads become impossible to deal with; they become eye-popping wide, and the market is moving so fast as to create its own stress.
    Last edited: Oct 28, 2017
  17. Frank_M

    Frank_M Member

    Two takeaways from Nassim Taleb:
    1. Don´t try to predict a black swan, instead prepare yourself for a black swan
    2. It´s a black swan event for the turkey, not for the butcher
  18. johnyoga

    johnyoga Member

    Love it!:)
    When you are long a hedge, it's a beautiful thing to sell into that mess...the widened spreads work in your favor...
  19. DGH

    DGH Administrator

    Hedges are helpful in sharp downturns (and I have them in place now), but one of the simplest and fastest tricks is simply to buy back a short or two, the end result being net long puts. Yes, it is painful to realize the loss on the shorts, but some of that loss can usually be recovered if/when the market stabilizes and if there is sufficient time to sell additional premium (at a relatively safe distance from the money). However, trying to recover all losses by a martingale approach is foolhardy. By utilizing this simple technique of short-covering, a devastating loss can be avoided, and the experience becomes "the cost of doing business" rather than a career-ending event.
    PK and Ice101781 like this.
  20. johnyoga

    johnyoga Member

    True, Dan. For others reading this that haven't been through a large smack down: the spreads do widen a lot during these periods. :eek:

    Folks, I have attached hedging research performed by members of the Society of Actuaries. If you have seen this before, my apologies.

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