With my Hawking Portfolio Hedge expiring today I want a new hedge for December. Although I would prefer to use the Quarterly Options that expire at the end of December the Open Interest is low and spreads are wide so I may have trouble getting filled on adjustments. I have therefore decided to use the standard expiration series expiring on the third Thursday of the month. I don’t really like these Options since, although the last day for trading is Thursday, the settlement price is set based on the opening prices of individual components on the following Friday – and this is not even the same as the opening price of the index itself! I have been burned on this in the past. Unless price is well clear of any strikes near the Thursday close I will probably close the position out (and absorb trading costs) rather than let the Options expire and take the risk on the Cash settlement price.
To open I have chosen a risk reversal (Long Put Spread financed through the sale of a short Call spread) that I was able to get filled on at zero cost:
The spreads are a little tight but it was attractive because of the zero cost. The short Call, at 2125 is a little lower than I would have liked going into the end of the year when prices usually tend to rise – so I will have to watch this one carefully. As in the past, if we get any kind of modest pullback I will be looking to hedge this off a little and to reduce my upside risk.
Maximum profit on this starting position is $12,500 with SPX closing below 2040 at expiration and max loss is $10,000 with SPX closing above 2135.
Update 1: December 02, 2015
As I hinted above, with the seasonal historical tendency for prices to move up towards the end of the year I am a little nervous about the proximity of the strike price of the short Call Option (2125) to the current index value. I have therefore rolled the Call spread out to the 2140/2150 strikes i.e. with the 2140 short Call slightly above historical highs (~2135) and a level of potential resistance:
This has cost me $1,000 ( 10 Contracts x 100 shares x $1) that I will try to cover through the sale of premium from Put Options. I also placed an order to sell 10 x 2020/2000 Put spreads for $3 ($3,000) but was not filled today.
Update 2: December 03, 2015
I was filled on the sale of 10 x 2200/2000 Put Spreads for a credit of $3,000. The new P/L profile is shown below:
Update 3: December 03, 2015
I have rolled up the 2040 Short Puts to the 2055 strike to bring in another $3,000 credit (5 Contracts x 100 x $6):
I now have a potential $5,000 profit with SPX closing between 2065 and 2140 at expiration and $10,000 profit with SPX between 2020 and 2055. I have risk below 2010 but there are still opportunities to roll the 2020 Puts down if price continues to drop in the next 2 weeks.
Update 4: December 09, 2015
Ok, with today’s drop in the SPX I’m adjusting my hedge position by rolling down my short Puts at the 2020 strike to the 2010 strike:
Update 5: December 11, 2015
The market seems to be getting very nervous prior to next Wednesday’s Fed meeting, so, not wanting to give everything away, I’ve rolled down the 2010/2000 Vertical Put Spread by buying a 1990/2000/2010 Put Butterfly. This should allow for a little time decay over the weekend and we’ll see what happens next week. If necessary I’m prepared to bail on this position because I have no feel for how far the market may move going into/coming out of the Fed meeting.
Update 6: December 14, 2015
I’ve bought back the 1990/2000 Put spread ahead of the Fed meeting just in case there’s panic selling:
Update 7: December 15, 2015
Ok, I am totally confused as to where the markets are going after to-morrow’s Fed meeting. When I opened this trade it was as a downside hedge, but it had upside risk and I was concerned about a bullish move into the year end – a “Santa Claus” rally – so I rolled my risk up to higher strikes. Then we had a strong pullback and I tried to lock-in a little profit by selling Put spreads – but this introduced risk to the downside and, when the pullback continued I didn’t want losses in both the portfolio itself and the hedge, so I removed the downside risk – but at the cost of re-introducing upside risk.
Now, going into tomorrow’s meeting, where will the markets go after the announcements? Is everything already built in to the current prices such that the anticipated rate increase will calm markets down and there will be little change, or will there be some sort of surprise and a significant reactionary move either to the upside or the downside? I have no idea – so I want to play this reasonably safe since Thursday is the last day that I can trade these Options before they expire.
I have therefore sold an un-balanced Put Condor spread to give me a very wide Iron Condor (1980 and 2140 short strikes) combined with a narrower Put Condor in the middle at the 2040-2055 short strikes:
This hedge is ~2SD wide and I’m hoping will restrain any significant movement following tomorrow’s meetings. Ideally, it would be a “non-event” and I could pick up a maximum $6,500 – but I’m not holding my breath.
Update 8: December 17, 2015
For all intents and purposes this hedge is now closed out through the sale of the 2035/2040/2055/2065 Put “Condor” spread for $3.00 ($1,500 Credit). There are four Option positions still open but these are almost certain to expire worthless tomorrow. Current P/L is shown below:
This means that the 3 week hedge position will close with a profit of $3,000, less commissions (that are a little higher than usual due to the number of adjustments made to account for significant volatility in this period). Had the order for the sale of the 2055/2065 Vertical spread been filled at $5.00, the potential profit would have been $4k rather than $3k. However, I would have had downside risk below 2040 so this is a safer exit that I can live with – and I don’t have to keep my eye on the position all day. It was a trade-off between a lower profit and increased risk – but, as time passed, the risk would have been reduced so I would have been happy to accept it and take a higher profit. So, if prices had dropped at ~2:00 pm this afternoon I may have been filled on the vertical spread rather than on the Condor – in fact, the platform was telling me that there was a higher probability of the vertical spread being sold than the Condor – but volatility and wide bid/ask spreads make it very difficult to discern which order will be filled, especially so close to expiration.