Wednesday, March 12, 2008

Covered calls, straddles, and strangles as hedges

As they say, the trend is your friend. S&P 500 is failing to breakthrough 13 day exponential moving average (EMA). I am taking this opportunity to fade the rally by adding hedges to my positions.

Most of the losses I have been suffering in this downturn have been to long positions I am holding. So today, I sold a bunch of calls slightly out of the money (OTM) 2-3 months out on many of my positions (i.e. covered calls). In addition, I am trying something new and selling call options naked against in the money puts, essentially turning them into short straddles or short strangles. I also sold some calls about support on my mess of Wachovia (WB) puts that gives me a weird P/L curve. It is basically a weird ratioed straddle with different months on the different legs. The P/L curve shifts right and up over time. The up shift is due to time decay (i.e. positive theta) and shift right is because my positive delta positions are longer duration than the negative delta positions. That is, the puts I sold are farther out than the calls I am selling.

In addition, I also sold some Washington Mutual (WM) short to hedge against my WB position. I don't usually short stock so this is somewhat of a toy position to gain experience.

No comments: