Using Space Trip for Upside move hedge

Discussion in 'General Discussion' started by Brice, Dec 7, 2016.

  1. Brice

    Brice New Member

    Good morning,
    Thanks so much for Ron's contribution to the site. Just wondering if anyone has used the space trip trade to hedge a massive upside move.
     
  2. Ben G

    Ben G Member

    The challenge with doing anything on the call side is that there just is not enough premium there. I have tried playing with upside hedges similar to the STT, and the further out of the money credit spreads do not have enough premium to pay for the closer to the money debit spreads. In the STT you have a very small debit, that is easy to raise to breakeven or above with time. With the upside STT, to get enough positive delta, you would have a very large debit that would be almost impossible to raise to breakeven, and would be very negative theta. At least this is what I have encountered in my attempts at upside hedging.
     
  3. GreenZone

    GreenZone Well-Known Member

    Due to skew, conventional structures won't work well on the call side.

    Are you familiar with the Kite adjustment ?
    If so, give that a shot as an adjustment (but not as a trade unto itself).

    Kite:
    You purchase an OTM long call, and you then finance at least half of this cost by selling a call credit spread slightly further OTM
    Here's an example:
    http://screencast.com/t/JVRjffN2QsHV
    BUY +1 SPX 100 20 JAN 17 2280 CALL @15.80 LMT
    SELL -5 VERTICAL SPX 100 20 JAN 17 2295/2305 CALL @2.30 LMT

    With regards to structures which work on indexes for big bullish moves, I'd suggest sticking with either ATM or OTM structures using puts......but you'll need to lean them with positive deltas.
    You could also use something like a risk reversal, but this is more of a pure directional (delta) play rather than an income trade. Theta is pretty much nothing.
    Here's an example of a risk reversal:
    http://screencast.com/t/CUJ0xbFMS
    SELL -10 VERTICAL SPX 100 20 JAN 17 2190/2180 PUT @1.95 LMT
    BUY +7 VERTICAL SPX 100 20 JAN 17 2285/2295 CALL @2.80 LMT

    If IV is very low, you can also consider an OTM call backratio, but again, only as a temporary adjustment.
    http://screencast.com/t/dLJLbHcvwaMW
    BUY +1 5/6 BACKRATIO SPX 100 20 JAN 17 2295/2305 CALL @-3.25 LMT
    Backratios are tricky if you've not traded them before.
    The "valley of death" is the biggest issue you need to fully understand how to manage.
    That T+0 may look nice now, but give it some time and it will start to droop down on you.
    But as an upside adjustment for a standard income trade, when IV is low, then sure, a call backratio can work nicely.

    Also, if you have a PM account, you could consider a reverse diagonal.
    http://screencast.com/t/9N0et5KKo
    SELL -1 1/-1 CUSTOM SPX 100 17 FEB 17/20 JAN 17 2305/2280 CALL/CALL @1.10 LMT

    One of the STT variants I'll cover in the my course is a bullish leaning STT, which is a very conservative way of leaning bullish and giving the market plenty of room to move.
    I'll also be showing why the standard STT doesn't work well on the call side of SPX, and last but not least, I'll show you some different underlying you can use where setting up an STT on the call side is viable.
     
    Last edited: Dec 8, 2016
    Ice101781 likes this.
  4. Rick T

    Rick T Member

    Ron, Since you mentioned your course, when's the ETA on it?
     
  5. GreenZone

    GreenZone Well-Known Member

    My target is by the end of this month (Dec 2016).
     

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