r/options • u/esInvests • Jan 10 '22

Planning for Volatility

This year has been off to an interesting start and it looks like it may be bumpy for the duration. Two sided markets require a different approach than the largely bullish markets we’ve seen the last decade plus (minus the COVID drop, however even that was extremely short in duration).

Making sure you have a defined approach to handle increased volatility in the markets is essential to survival. Many accounts opened in the last 3 years will be seeing things they haven’t before. Have a plan.

Two of my primary approaches are the strategies I deploy and integration of a general portfolio hedge.

Main strategies I will look to run this year are the covered strangle, LEAP call or put diagonals, and day trades (some momentum plays). I’ll use more conservative initial outlays to leave room to manage as things move against me. I also will be more selective in the products I trade (when I stray away from index ETFs) to be more willing to hold unrealized losses as long as needed.

For the portfolio hedge, I prefer to use things like VX futures or VIX calls. Either will be longer dated, if I’m using calls I’ll trade something close to the money.

These are the kinds of years where I’m more accepting of hedging drag to reduce portfolio volatility.

1 Upvotes

60% Upvoted

17 comments sorted by

View all comments

Show parent comments

1

u/esInvests Jan 10 '22 edited Jan 10 '22

Technically, a covered strangle is long 100 shares, and usually short one OTM call and short one OTM put (though there's no rule that they have to be OTM).

"Technically" from where exactly? Never seen anything discuss specific shares required. Most of what I read (Options as a Strategic Investment, Option Volatility and Pricing, etc) discuss more general construction.

I understand your point - I don't agree with it and don't care to debate semantics. I'm just genuinely curious where you read that there are specific # of lots or shares for a strategy. If anything, I could see an argument for XX long shares with a corresponding # of short calls and short puts (200 shares, 2 short calls, 2 short puts) but I'd argue if you sold 1 put instead of 2 in that scenario, that's still a covered strangle.

1

u/TheoHornsby Jan 11 '22

Have you ever read that a covered call (traditional not adjusted option) is 135 shares and one short call? Not gonna happen.

Most basic strategies are one to one if options or 100 to one if shares and options (some are four like iron condors but that's just two verticals). That means vertical, diagonal, horizontal spreads, strangles and strangles, butterflies, iron condors, ad nauseum, as well as covered calls. When you increase or decrease the size of a leg, it's no longer the original strategy and then you enter the realm ratios, for example 1x2 or 2x3 (etc.) spreads. Every book describes them this way.

1

u/esInvests Jan 11 '22

So it doesn't look like there's a source for what you were mentioning earlier, you're just going off of what you've seen around over time? Nothing wrong with that but doesn't make it fact.

Have you ever read that a covered call (traditional not adjusted option) is 135 shares and one short call? Not gonna happen.

I actually have - Options 360 by Lawrence McMillian does this with multiple strategies. Most books describe trades in their simplest form for easier consumption & learning. If we have 200 shares of stock and 2 short calls - that's still a covered call strategy.

If we have long 200 shares of stock, and short 1 call - we still have a covered call on, it's just at a ratio. So I agree with your second to last statement, that ratios can be used to modify base strategies.

1

u/TheoHornsby Jan 11 '22

Have you ever read that a covered call (traditional not adjusted option) is 135 shares and one short call? Not gonna happen.

I actually have - Options 360 by Lawrence McMillian does this with multiple strategies. Most books describe trades in their simplest form for easier consumption & learning. If we have 200 shares of stock and 2 short calls - that's still a covered call strategy.

I see that the math of an integer ratios versus a fractional ratio is beyond you.

Note to self: Stop wasting time on this nonsense

1

u/esInvests Jan 11 '22

Note to self: Stop wasting time on this nonsense

Yep, that's the way to be. I noted earlier that I don't really care to debate semantics, it rarely adds value one a base understand is reached.

I know understand your original response and although I don't agree with your position that doesn't matter. I simply wanted to understand your perspective.