Hedging and removing hedges

#1
So I have been experimenting a bit with the calendar hedges similar to rhino, but I am trying to work out my own rules so that I can play around with these as needed. I think I can model the hedges in TOS well and I can see my T+0 line change as I want it to. However, I am not sure how do I go about removing hedges when either they served their purpose, or the market has reversed and I do not need them any more.

Take today's scenario, I placed a hedge for SPX at 2925 (calendar). The idea is that if market continues to move higher, calendar will make money. This works well if market continues to move higher. What if it does not? When do you give up on the hedge?

I can think of 2 options:
1. Give up immediately. As soon as the condition that made you place the hedge is not valid, why do you need the hedge? Issues with this: if market keeps moving in same place, then a lot of whipsaws.
2. Wait till the market goes completely beyond your downside break even point. This avoid whipsaws, but the hedge loses a lot of money in the interim.

I know we should backtest etc., but conceptually what makes sense? What other approach would you use?

[ Note that even if you used a delta approach, it will fall into the 2 choices I listed above. Let us say your delta target was +/-50 and you are now at 55 and place a hedge, the question is whether you will remove the hedge when market comes back to +45 or +49, or will you wait until it goes to -51 ... completely other side.]
 
#2
First of all I must say that I have not traded calendars To me they are too complicated and I don't like the fact that the expiration line keeps changing

Having said that, from what I have observed from some of the presentation that I have seen is that you have to have the right structure for the calendars to work properly
In general the calendar would benefit from vol increase so I am just speculating here that if the market goes up the vol will come down so the calendar would not do so well in an up market but as I said that depends on how the trade is set up

As far as hedging I would say it's somewhere in the middle of choice 1 and 2
From what I have seen in one of the presentations I am not sure if it was Tim or someone else who mentioned that that they would place a trade at a certain threshold to cut the delta in half and than have another threshold to take it off

I am not sure what those threshold would be but I imagine that would be dependent on a combinations of factor including the size of the underlying and the volatility
So in your case let's say your delta threshold is 50 so you would put on a trade that cut's your delta in half and now you would need another threshold for when you take it off
I would say that threshold would have to be somewhere beyond where you placed the hedge on in the first place

Basically you would not want to place the threshold too close to each other because of the whipsaw as you mentioned
A couple of points + or - around 50 is too close in my opinion
The way I look at it is a hedge as a way to minimize big losses while still staying in the trade so that is not something that you would want to take off too quickly You would have to wait until you are fairly certain that the market has resumed the initial direction
In other words you were wrong in the direction of the market but you don't want to get out or you want to minimize the losses so you put on the hedge but as the market turns around you have to make sure that you are certain that the market has resumed the initial course
A hedge is not something that I would consider to put on and off quickly

You might be better off if you make small adjustments along the way to adjust the delta before it reaches your threshold unless there is a big overnight gap event that way you could probably leave the adjustment in place if you are willing to accept a small loss or reduce your profit target even if the market turns around
That's just my idea others can feel free to disagree
 
#4
And funnily enough library has a recording where Tim.P talks about calendar as hedges which was done the same day I posted the question.
 
#5
Yes I saw that too,
Notice how he said "In theory" before showing what happens
If you have not watched it on CD check out Ron Bertino"s Weighted Vega on YouTube to get a little better understanding of how calendars work in reality
 
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