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.]
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.]