Long story short, i want to short but without unlimited downside, so naked shorting is out of question.
Why not plain put options? Because a lot of the stocks that my system proposes have expensive options, so that a large move down in the next 6 months is necessary to even get to break-even.
Why put spreads? When options are expensive the biggest premium is in the at the money option, the options further in the money have less of it.
For example with APLD you can currently sell 9$ options Apr25 for ~2.7$ and buy APLD 14$ options for ~6.5$. The spread is 3.8$, which is the most you can lose, but the spread goes to 5$ if the stocks stays below 9$, so you make roughly 30% in that case. Making 30% while being able to lose 100% doesn't sound enticing at first, but you are also making money if the stock moves up a bit. So the probability of making money is a lot higher than by buying out of the money put options.
I created a spreadsheet with all transactions of my system and the option payoffs in each case and it looks like the system is on average roughly twice as profitable as just going short the stock.
Has anybody traded bear put spreads before, or has ideas what i am missing?
Could you please elaborate? are you selling the 9$ put while buying the 14$ put? And are you holding the underlying?
Yes, buying the 14$ put and selling the 9$, not touching/holding the stock.
This is the spreadsheet: https://docs.google.com/spreadsheets/d/1ldYWfsPwPQ6X9_X2iun0BNb2Tm7ilV2wRXkrc_lbkIs/edit?usp=sharing
Digged deaper into the spreadsheet.
With cheap puts 20% of all 6 month timeframes would have been a 0. There was a timespan from 2012->2014 where all 6 month periods would have been a devastating loss. Imagine putting 25% into this every every half year, you would have lost 150% of your money in that time.
With put-spreads 0%. 1 6-month period was a 60% drawdown. (that was also in 2014). Overall CAGR would have been 12%. With naked shorting 6% without lending fees (probably negative after them). Since puts would have collapsed so often there can be no CAGR, but assuming you would replenish the hedge every time it is the better hedge because you just need so little capital to get a good hedge. Arithmetic average returns for cheap puts are at 40-50% in that system.
While heding with puts i would not put more than 5% of total capital into the hedge, with putspreads you can afford to go much bigger.
I think i will use a hybrid approach here with 10% for hedging and this will be split up into naked puts and spreads, depending on what would be most profitable for the stock according to the spreadsheet. Most of the capital will go into spreads, with only 2-3% for naked puts. I think i can get to 0 option premium paid that way, so no decay on a portfolio basis.
I will keep doing this until the market gets a lot cheaper on Shiller P/E and TMC/GDP ratio.
Hello,
If you want another perspective on Hedging with options I would highly recommend the podcast The Trade Busters. Also I noticed you trade TSLA so if you sign up for optionomega.com you can backtest your strategy to see how it would have worked just like P123 for options. (Not as good as P123 but it's options) You will also get a quick look into how those strategies work when the VIX spikes. It's very interesting especially if your naked.
Cheers,
MV