Ron Bertino - Hedge Space Trip Trade

Ron Bertino

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Here's a guest presentation I did over at OptionsTribe on Jan 31, 2017

Note that this is a trade built to take advantage of portfolio margin or SPAN margin, in order to use it as a downside hedge.

Sample setup:
  • 90 DTE or higher
  • This is a negative vega trade, so it can potentially be beneficial to initiate the trade when you get a spike in IV after a pullback
  • Look for a 25 point wide put credit spread in SPX, which will give you at least $1 credit (sell 10 of these); typically at around -6 delta, using the 0/25/50/75/100 strikes
  • Go out to 1 std dev (around -16 delta) and buy a 25 point wide put debit spread in SPX (buy around 4 of these), using the 0/25/50/75/100 strikes
  • Confirm that your position deltas are slightly negative (around -1 to -3 deltas per tranche), using TOS volatility smile
  • Confirm that your T+0 crosses the zero line behind the upmost long put
  • Upside risk should ideally be 2% to 3% of the max RegT risk (max of 5%); trade starts with a small debit

Execution:
  • Conservative:
    • try to get the trade filled as a condor
  • Aggressive:
    • first get filled on the put credit spreads, and then get filled on the put debit spreads
    • If you are going to do multiple tranches, then I suggest doing 1 tranche at a time so that your deltas are kept in balance

Sample setup:
STT-01.png

After 30 days:
STT-02.png

After 60 days:
STT-03.png

Possible downside adjustments:
  • Add a new STT tranche as you normally would, and tweak the number of new put debit spreads such that you get the overall combined position delta you seek (ie you may be buying 5 or 6 put debit spreads rather than the usual 4)
    • Have a look at the upcoming section called “price movement layering”
  • Add a put debit spread
    • You can overlap the strikes of existing put debit spreads
  • Roll down the entire uppermost structure
  • Buy a bearish butterfly, with the upper longs overlapping the shorts of the upper put debit spread (you are rolling back the shorts and financing the move with the sale of some extra put credit spreads)

Upside management:
  • Don’t adjust until you see a “profit hump” develop, which happens as time goes by (a few weeks)
  • Possible upside adjustments:
    • Sell a new put credit spread
      • Make sure that you are getting at least $1 credit for a 25 point wide put credit spread
      • This also has the effect of lifting up the upper expiration line, and is how we can make this trade a “free hedge”, with zero upside risk
      • Make sure that your adjustment doesn’t violate any of the standard trade setup criteria, such as needing to have slightly negative position deltas
    • Roll some short puts (or entire put credit spreads) up higher
    • Add another tranche higher up (see the “price layering” topic)
    • Add an ATM trade (Road Trip, Rhino, M3, M3U)

Taking profits:
  • Remember that this is a downside hedge, not an income trade
  • Taking profits:
    • Close out all tranches
    • Peel off some of the tranches, to lock in profits
    • Flatten deltas
    • Your position will have negative deltas
    • If you think the market will stabilize and/or bounce higher, then you could make a slight bullish adjustment (eg sell a new put credit spread) in order to flatten out your deltas
    • This will allow the position to continue to decay and build a bigger profit hump

Exit:
  • When price enters the structure

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In order to learn income versions of the Space Trip Trade, as well as the Black Swan Hedge, head over to:
https://TradingDominion.com/pmtt
 
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