Hedging Short /ES Position

As many of you know who have been following the blog the past month or so, I have flipped from bullish to bearish. Admittedly I have been wrong as the S&P 500 has rallied over 100 points since I initiated my short. As you may recall I sold a call on the /ES at the 1,555 strike for 32 points that effectively got me short at 1,587 which was only about 5 points off of the S&P 500 all time highs. We have since then traded to NEW all time highs several times over. With the most recent high putting us 1,000 points off the March 2009 low of 665.75...putting the new all time high at 1,665.75. The thing to keep into perspective is that it took only 17 months to trade off the previous all time high in 2007 to the March low. It has taken over 4 years to recover from that fall and finally build enough momentum to make a new all time high.

So what have I done while the market has moved 110 points against my short position? I have bought OTM upside calls at 1615, 1650, and 1700. I have sold various OTM puts and put spreads. The position started off as a naked call position that had unlimited risk to the upside, but once my breakeven was challenged I had to do the prudent thing and begin to hedge to the upside while defining my maximum risk. At the same time I have had to sell put premium in the direction I want the market to go at extremely low volatility levels. The short position at this point is really just a stake in the ground to trade against. So far I have moved my breakeven up 30 points to 1,618.

Over the coming weeks I will continue to trade premium around my position. We still have 33 days left until expiration...and really about 30 days before I need to start thinking about rolling the short call out to pick up some duration and hopefully some additional premium.

I will continue to be conservatively aggressive if that makes any sense. Although I have sold OTM premium in the direction I need the market to go, I have been conservative in the sense that I have left my ability to profit from a downside move open. My preference would be to get a nice pop in volatility and thus option premium that would allow me to be a little more aggressive in trading around the position. Otherwise I am forced to continue to sell low vol premium.

Good Luck Trading!

In The Money Trades




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