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To close my position or not to close my position ahead of the long weekend and Greek referendum. It's in the black but not as much as I would like. Sigh!
/rsm005/
Can you help answer these questions from other members on NexusFi?
Thanks again for ideas and information from this thread and from RON99's freely sharing information.
In part this information has allowed my investment account to have a 42.9% gain for the first half of the year.
(January - June, including commissions.)
Thanks. Just wanted to make sure I'm appreciating the magnitude of all of this. Presumably, the greatest risk here is a large gap event. Based on that graphic, it seems like 2,000 would be a conservative estimate on the average number of contracts you are holding at any point in time. So, looking at the 3 delta Sep 1650 puts, a 30% gap down in the ES would roughly translate into a -20,100,000 loss = (2070 * .7 - 1650) * 50 * 2000 ? This ignores any remaining extrinsic value in the options. Is that approximately right?
I'm not trying to be argumentative, so please don't it take it that way. Just trying to do a healthy exploration of the risks - can never be a bad thing. To that end, a couple of points:
1. Why should we assume that history is going to repeat itself? No one saw Black Monday coming back in 1986. Same goes for 9/11 and I would think that the world we live in today makes unprecedented events more likely than ever. After all, why would anyone be bidding for these cheap puts if such risks weren't real? The next major gap we see may be 50% down on open...we just don't know.
2. Even if we don't see bigger gaps in our lifetime, the marks on these puts in scenarios that have already occurred will still be an extraordinary loss large enough to wipe out the account. Take 9/11 as an example (which didn't even make your list):
Using those inputs to price 90 DTE 1650 puts would value them at 64.77. That's a mark-to-market of -6,476,961 on your 2,000 contracts. In reality, the mark would likely be much worse given that the downside skew would likely have the IV of those puts well above 43.2%.
53% IV -> -9,545,393
63% IV -> -12,824,054
Just for fun, the VIX was said to reach 150 in the '87 crash. At a 21% drop in ES and 150% vol, these 90 DTE 3 delta puts would mark at -50,898,281.
With this many contracts, would a 5% gap down and ensuing vix pop be enough to clean out the account? Maybe...and that's certainly not a far fetched scenario.
Anyhow, the point is that there is no exiting ahead of time for a number of unknown market shock scenarios and this is the risk that is being sold in these puts. I'm not judging the strategy and it can work if you make your money and get out before the account destroying market shock comes, but let's be honest about what can happen here. Limiting the risk discussion to what's happened in the past is far too simplistic in my opinion.