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6 Comments

  1. ANDREW DURRETT
    February 27, 2021 @ 3:23 pm

    It always feel wrong to me to compare the performance of bearish options plays to the long underlying. I’d rather see performance vs shorting the underlying, or buying the inverse etf if available.

    The question this doesn’t answer is – If we want to hedge against SPY would it be better to do it directly or through long puts.

    Reply

    • spintwig.com
      February 28, 2021 @ 10:51 pm

      Makes sense. I this scenario the client was seeking to overlay the hedge against long SPY to see the relative degree of inverse movement.

      That is indeed a good question. It depends on what the hedge is allowing one accomplish that can’t be done without it.

      Reply

  2. Strider
    March 3, 2021 @ 8:32 am

    Hello! I’m the client who requested the study. Thanks for the comment Andrew. I think I’ll follow through on your suggestions and compare your ideas to continuous put buying. If I’m right and Spintwig can comment as well, shorting SPY during a crisis would require timing and skill (which I don’t possess!). The returns of shorting SPY continuously….well they’re negative but maybe there is something there.

    IIRC hedge funds run a long short strategy where they position themselves net long stocks but short the index in a 1.3 to 1 ration (the 130/30 fund style). Leveraged inverse ETFs face a continuous headwind of losses due to volatility drag but perhaps they could be used as a hedge if the market has a 3 sigma or greater drop or greater.

    Reply

  3. dachent
    March 13, 2023 @ 12:43 am

    This is a fantastic study. Thank you for sharing!

    Would the result imply the going further OTM (50%, 60%) and increasing maturity (2-3 yrs) would reduce the cost of the strategy and increase its effectiveness?

    Conceptually, I think, that doing both increases vega, decreases theta, and allow to lock in low volitility.

    Right, or no?

    Reply

  4. dachent
    March 13, 2023 @ 12:44 am

    This is a fantastic study. Thank you for sharing!

    Would the result imply that going further OTM (50%, 60%) and increasing maturity (2-3 yrs) would reduce the cost of the strategy and increase its effectiveness?

    Conceptually, I think, that doing both increases vega, decreases theta, and allows to lock in low volitility.

    Right, or no?

    Reply

    • spintwig.com
      March 13, 2023 @ 6:54 pm

      Thanks!

      In theory, I’d wager yes. In practice, there are [greater] liquidity challenges that far OTM. Getting a fill and/or getting out will be [more] problematic. As for duration, a rudimentary review suggested the effect tapers at around 90 DTE.

      Since the idea is to profit based on [non-linear] changes in vol expansion, it may be more effective/efficient to open a long /VX position that has roughly 90 days till expiration and roll after holding for 30 days.

      Reply

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