kmcintyre![]() Legend ![]() ![]() ![]() ![]() Posts: 410 Joined: 8/30/2007 Location: Valley Center, CA ![]() | LSJ - I'd love to learn more. How about a new thread dedicated to the nuances of pair trading? You know things I don't! :-) As for N's future implementation of a simple long put strategy for protecting against a meltdown, I've been giving it a bit more thought ( 'cuz I need to improve my own hedging strategy...) I think the gamma curve is key to picking the right put option to buy for protection. The gamma curve is an 'S' curve. The change in gamma happens quickest in the middle of the curve. As expiration approaches the curve becomes a step function - 0 or 1 - in the money or out. Delta of 0 or 1... Also of significance is the theta decay curve. The cost of long options is most expensive near expiration, when the gamma curve is steepest. Holding long options with a large DTE (days to expiration) costs less per day, but their delta (and hence value) isn't going to move much in a market crash since time for the market to recover is built into the option. Weekly options cost the most per day to hold (highest theta) but have extreme gamma swings that move delta from 0 to 100 with a small move in the underlyings price. I want catastrophic insurance. I want to buy cheap options that pay off immediately in a flash crash. So for me, shorter term options (DTE < 15) make sense. I want to buy a strike that is very close to the price I want my insurance to kick in. I expect that I'll have 0 benefit if the underlying (QQQ, RUT, SPY) doesn't fall below my strike. I expect that I'll recieve a nice payout (insurance benefit check) if the market drops below my strike. The closer to option expiration, the higher the delta, and the closer to 1:1 payout I'll get. I have been buying longer term (DTE > 30) ratio spreads to keep the cost of insurance lower. That approach would pay off if I held them to expiration and the market ended up significantly below my long put strike. (Mostly because the long term options become short term options eventually, so they eventually get to a high delta and start approaching 1:1 downside coverage...) So how much are low DTE OTM puts going to cost me? Is the cost of insurance worth it? That will take more analysis. But generally, the edge is always in favor of the house, the option sellers. Options are priced such that over the long haul option writers have the edge. But that doesn't mean I don't want to buy insurance, be it home, auto, health, death, or portfolio.) Happy Presidents Day! Keith |