Hedging an OTM short put option on stock index (DAX)

smjohnson8256 · Post by **smjohnson8256** » Fri Sep 13, 2019 1:32 pm

Nikol, here are some specific numbers.

Dax options, 2012-2018, 304 trades, each time put on 4 days before expiration.

--short put, 3-4% OTM--------------

mean bid and ask 8.227632 10.846711

P/L if sold at bid

Min. 1st Qu. Median Mean 3rd Qu. Max.

-265.500 2.500 4.600 1.754 9.625 63.590

--long put, 5-6% OTM--------------

mean bid and ask 4.076645 6.582895

P/L if bought at ask

Min. 1st Qu. Median Mean 3rd Qu. Max.

-98.100 -6.725 -3.800 -5.795 -2.500 121.900

--long call, 5-6% ITM, same strike as long put--------------

mean bid and ask 540.4039 571.6753

P/L if bought at ask

Min. 1st Qu. Median Mean 3rd Qu. Max.

-781.300 -106.400 22.910 -8.948 123.400 416.400

smjohnson8256 · Post by **smjohnson8256** » Fri Sep 13, 2019 3:19 pm

mean dax, mean sputstrike, lputstrike, mean callstrike

10483.606 10096.875 9924.671 9924.671

nikol · Post by **nikol** » Fri Sep 13, 2019 3:43 pm

Not what I expected to see. No need those P/L figures.

But anyway, see example:

sell OTM 3-4% put at 8.2 => short 3-4% put position + 8.2 cash

(scenario: maybe be you can wait and sell it at 10.8, so you get 10.8 cash)

buy OTM 5-6% put at 6.7 (?) => long 5-6% put position - 6.6 cash.

(scenario: maybe be you can wait and buy it at lower price, so you spend 4.1 cash)

depending on the time you wait in both trades you might get from 1.6 to 6.7 in cash, while you have on your book straddle

long 5-6% put and short 3-4% put.

1.6 - 6.7 is your 'sales' (+). Your costs (-) side is potential loss from short position capped with long put. And still you have quite visible chance of loosing (those negative numbers at Min P/L).

Note, that Long call 3-4%,Short futures needs more upfront capital than simple Short put 3-4%.

And, yes, reread what Baltazar says - there is no free lunch.

However, to not discourage you, I recommend to try it with small amount of money or you can do real life paper trading in the excel.xls by setting up position at time=0 entering prices, looking evolution of PnL, closing position at end of the week and thinking about all kinds of "what ifs" while doing end of day risk management.

You will gain huge experience.

Warning:

I am a bit surprised with relationship of prices, but how can it be that:

price of 3-4% put > price of 5-6% put ? Are you sure?

To clarify definition: 3% Put has a strike = spot*0.03, right ?

nikol · Post by **nikol** » Fri Sep 13, 2019 3:49 pm

@deeds

Once I was asked to opine on app with 5min/15min/30min maturing binaries on Crypto.

Looks really addictive.

I regularly receive calls from binary sales and enjoy those talks a lot, by asking questions about which model they use, greeks, and finally "Hey, 1 min ago you promised me that I never loose; can you put a margin on escrow account to guarantee that?".

deeds · Post by **deeds** » Fri Sep 13, 2019 4:21 pm

Thanks, @n,

Would expect business plan for a crypto binary app to include eventual regulation (in the industry survival scenario)...'twas so?

To confirm, these salesguys' and firms are probably licensed and registered?

I would think even for gambling the app would be subject to regulation...certain it's true of W.Hill, etc

nikol · Post by **nikol** » Fri Sep 13, 2019 8:06 pm

Binary sales is plain scam to my opinion. I just had fun.

App would be banned under gambling law if it were about fiat.

I made couple of remarks and departed these guys to have no link between us whatsoever.

Thinking: On the other side, what is the crime about letting people gamble with tokens named BlablaCoin on derivatives on let say Bitcoin? This process is called - "gamification". Of course, there are more useful ideas than just gambling.

Still, my general perception is that crypto will become regulated at some point and quite a number of businesses and people will be punished retroactively. "Big Brother is upon us".

smjohnson8256 · Post by **smjohnson8256** » Sat Sep 14, 2019 10:00 am

No.

3% OTM put was supposed to mean strike = spot * 0.97

See my post 2019-09-13 15:19

x% meant x% below spot

--------------

To clarify definition: 3% Put has a strike = spot*0.03, right ?

nikol · Post by **nikol** » Sat Sep 14, 2019 10:57 am

ah. ok.

you> I cannot do it buying the 5% OTM put at the ask, because this ruins the overall P/L.

My suggestion was to check synthetic OTM x% put replacing it with ITM %x call - Fut. You said it is even more expensive. Perhaps, this is it.

However, if you really observe anomaly, try to sell expensive synthetic and hedge it with real put? Dont forget transaction cost.

Baltazar says that you should involve dynamics, i.e. try to predict and enter at most optimal moment.

Good luck.

deeds · Post by **deeds** » Mon Sep 16, 2019 5:23 pm

"On the other side, what is the crime about letting people gamble with tokens named BlablaCoin on derivatives on let say Bitcoin? This process is called - "gamification". Of course, there are more useful ideas than just gambling."

where gamification includes the exchange of cash for contracts (or creating a platform for it) i think there will be regulation and so probably there will be some crimes, and not a few accidental

agree about crypto, but i can't help wondering what that will look like...an IETF/ICANN of currency?

nikol · Post by **nikol** » Mon Sep 16, 2019 5:39 pm

Indeed, but if to generalize one can see few layers of legality here:

1. fiat vs bitcoin : exchange

2. bitcoin vs token (coin) : exchange

3. token : gambling

Level-3 is anything like game. One can buy castles, tools, weapons inside it with gambled tokens.

Then, someone organizes exchange of tokens to bitcoin (or any other popular coins).

Where is a border?