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Upside teenies on pullbacks

Discussion in 'Options' started by DavidF, Sep 16, 2016.

  1. DavidF

    DavidF Well-Known Member

    Does anyone else buy upside teenies to hedge their delta neutral(ish) trades?

    I know it´s not the done thing as it´s mostly speculative and a theta burn but anyone who has sold calls as part of condor after a vol spike knows how quickly they can gain momentum on a rebound, even with vol crush.

    I bought some Dec SPX 2350 calls dirt cheap on this pullback (going for 80c or so now), prob. lose some cash on them but if Fed doesn´t raise and AAPl contiunes upwards into Oct earnings (apparently explained 20 of the 21 points on SPX yesterday) then seems like a reasonable upside hedge for Fed annoucement.
    Last edited: Sep 16, 2016
  2. Teddy

    Teddy Well-Known Member

    I do. But I buy teenie puts.

    Why are you buying a 2350 call out in Dec? To do realize that volatility is quite high now and that the 2350 is so far OTM. That is a delta 2 call.

    Where did you get the concept of the teenie?
    Last edited: Sep 16, 2016
  3. DavidF

    DavidF Well-Known Member

    An upside move/gamma completely outweighs the vol crush on these calls. For example if you bought 20 x delta 1.9 call for 98 c on June 27th after Brexit when IV spiked you´d be up about $20k by mid-July. Once these things get teeth they can double i value with each 1% move in SPX.

    My experience is from observing the amount of times you get hit by "selling volaitilty" with low delta calls after a pullback.

    Teenie concept is old, refers to low delta protective puts.
  4. Teddy

    Teddy Well-Known Member

    I guess if you are bullish it works.
  5. DavidF

    DavidF Well-Known Member

    My other trades are heavily slanted towards sideways and down, it´s just a cheap hedge. In the same way that teenie puts don´t make you bearish.
  6. Marcas

    Marcas Well-Known Member

    I share your pain with short call credit spreads on upside moves. I didn't try long calls as adjustments but it seems that they don't do a job, especially long term. They decay fast and you need big rally for your position benefit from theirs gamma.
    For how long are you using long calls as protection? Just wonder, because I'm diverting from this type of trading, at least as a bread and butter/
  7. DavidF

    DavidF Well-Known Member

    Hi Marcas,

    You´re right, they need a rally. That´s why I´d only buy them on a pullback and as a hedge. And yes they decay fast, but I´ve other neutral/bearish positions which are decaying even faster but which, without the calls, make nothing/lose on a bounce and leave me chasing the market vulnerable to whipsaw.

    As straight calls they´re only meant to be held for a short period of time (weeks to a month). I´ll be assessing late next week if I want to sell them/use them as a hedge/take a loss.

    As I wrote once they get teeth they´re powerful. For example if you bought 2 delta calls in mid Oct 14 for close to $1 they were worth approx. $15 a month later. Of course the bounces are often inverse to the pullback and we´ve only seen a few percent in recent weeks but if you look at the Nov prices in the attached chart you get an idea how much they´d have to move in 30 days to break even. You can also backtest the MIV/price of these calls before and after a pullback to see if the "vol. crush" fears are justifed.

    Here´s a chart of calls and puts and their corresponding greeks/prices for Dec. Compare the gammas and MIV of the calls versus the puts. This, and backtesting what happens to these calls when purchased on dips, is why I´m a buyer of cheap calls after a pullback, not a seller.

    Screen Shot 2016-09-17 at 09.07.17.png
    Chuck likes this.
  8. Trader G

    Trader G Well-Known Member

    This is the exact scenario that I have the biggest problem with. Like a lot of us, I trade a bearish fly position which is weakest on the upside. Instead of over adjusting my fly I have been searching for a complementary trade that makes it's money on a move up but doesn't get killed when we head back down. The problem is that the skew which we take advantage of on the put side below the market really penalizes most trades on the upside. I have looked at everything from risk reversals (selling put credit spread buying call debit spread), diagonals, calendars, and even just straight verticals. Is there anything you guys use systematically to hedge your trades for upside movement?
  9. Marcas

    Marcas Well-Known Member

    I would not buy long calls, even on pullback as I expect move down in overall market and it is doesn't fit my style - i would have burning feeling of throwing money away (unless somebody convince me that I'm dead wrong). I would, as I did this once or twice, if at all, buy ATM call (on pullback) just for quick cash. Downside is that you should babysit this call.
    Regarding upside moves. I traded condorish trades. I was selling short Call Spreads on up moves about 1/3 of desired position and rolled them up if necessary. Up in month if possible and up in time if necessary.

    I looked at SPX 2350 C. theta is about $2 and increases as SPX goes up. I don't see why you would buy them (I don't see your trade either mayby up protection is what you need).
    I think you benefit from them only on big up move (spec trade before rates go down :) ) otherwise there is only psychological effect, imo.
    Last edited: Sep 17, 2016
  10. Greg K

    Greg K Member

    I would say that is more speculation than a hedge or maybe a short term hedge
    I would only put it up the day before if the market stays around here and doesn't go up in anticipation and probably take it off shortly after any market reaction to the fed announcement
    If the market moves up 50 points or more from here you might make a couple hundred provided you are watching the market and are ready with your order I think it will stop or slow down at around 2190 and you will start loosing or not gain much more after that I see the mid price today is around 0.62 so it's loosing already
    I guess it probably depends on the existing trade expiration and where is your t+0 line
    If you predict the after the Fed announcement the market will go up you could adjust the upper wing to raise up the tent if you are trading butterflies
  11. DavidF

    DavidF Well-Known Member

    Like every strike in a complex position, in isolation they´re speculative. But as part of my overall position they´re a hedge. In periods where there could be a lot of movement (pullback, Fed, BoJ) I prefer to give up theta and cover directional risk.

    Yes, they´re losing already, just like every long position with extrinsic. Yes, they lose a lot of theta if the market goes up, but I haven´t paid for the extra theta so it´s not like buying expensive calls/puts.

    What I´m doing isn´t so unusual, John Locke buys OTM calls if conditions are right in the Rock trade, you buy puts to hedge a weirdor, Paul Demers buys (close to) ATM calls. You could apply your arguments to all these set-ups if you took one aspect in isiolation.
    Last edited: Sep 18, 2016
    Paul Demers likes this.
  12. Greg K

    Greg K Member

    I understand what you are trying to do but I don't know where or what is your overall existing position or trade structure like where this far out off the money teenie would make that much of a difference to hedge your entire trade
    I was wondering what would be your expected move after the Fed announcement ? Are you expecting the market to go well above the most recent high of around 2190 ?

    Buying puts in a down market makes more sense because you get more help from the rising IV
    Buying calls closer to ATM also works because you get a benefit from the intrinsic value as it goes into the money
    I am not familiar with the Rock trade so I am not sure what would be the right condition that would justify a far OTM call
  13. ACS

    ACS Well-Known Member

    The Modified Rock configuration uses OTM calls but if you follow John's webinars, it's a configuration that he very rarely uses because of the drag those calls cause to the P&L if the underlying is not moving very fast.
  14. Greg K

    Greg K Member

    I have no problem with using OTM calls to hedge a position I just feel that the 2350 call mentioned is way OTM in price and time to have any meaningful effect That's more than one SD away even for Dec expiration
    Having an Oct trade. For 0.82 cents (today) the 2250 Oct call could have been bought which is 100 points closer and I think for almost the same price it would have been a lot better hedge It has a higher drag than the Dec 2350 but if a big move up is expected I think that may be a better choice
    Obviously this is just a one or two day trade not something you want to keep for weeks although for a 5 lot that I am looking at between 2140 and 2190 you are only making about $200 less on the p/l with just 2 calls you could keep it longer in case it whipsaws a lot

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