Portfolio Management - Hedging with SPY | Everyday Trader

[Music] hey everyone welcome back to the show thanks for tuning in my name is Mike this is Nick this is everyday trader and today we're gonna be doing something and talking about something that this man right here does every day in his account definitely definitely something that is an integral part of my trading strategy and risk management and just how I trade in general it's probably the biggest part I didn't say I would say it's it's a great tool and it's a great especially if you're a beginner or even intermediate trader it's a great way to help manage your overall portfolio by just using one underlying definitely so that's we're going to talk about today we're gonna continue our portfolio management week and what we're going to talk about today is managing and hedging portfolio Greeks with just using SP Y and there's a number of reasons why we choose SP Y specifically but we're gonna get into those and we're gonna also really talk about why this is such a powerful thing to do and it is definitely the most efficient way to manage the portfolio which is what we're all about getting in the platform seeing what we need to adjust adjusting it and getting out so SP Y is definitely that instrument that allows us to do that so why would we choose SP Y when we're looking to manage and hedge our portfolio Greeks well SP Y reflects the movement at the sp500 which is going to have a basket of the most popular underlyings and the most liquid underlyings all your household names are gonna be in the S&P 500 and that's why we consider it our market indicator so when we look at the SP 500 and why we choose SP Y the first reason is of course because we have exposure to all those household names the most liquid underlyings but also when we look at tasty works our account Delta is actually beta weighted - SP Y so we'll talk a little bit about that but if you look at the image to the right you can see that the yellow box highlights my account Delta and that is what is beta weighted the Redbox which is my position Delta those are all actually raw values so just wanted to put that out there and make sure that everyone understands that just the account Delta is what's automatically beta to SP y position deltas are not so on your show at 2:00 o'clock every day what do you guys look for in managing your positions with SP why do you first look at your position deltas you only pay attention to the portfolio deltas I think it really depends on the situation right now with few positions on I'm looking more at each of my positions in each of my underlyings I have only one or two trades I have an iron Condor a strangle or something there where it's not a mix of different positions or rolled rolled positions so for me now I am looking mostly at the position Delta but when you start to incorporate more trades like let's say you've you placed an iron Condor and you add a strangle later on and you have to roll up a put you know that's when I start looking at my overall beta weighted deltas to see kind of where if I'm if my overall Delta is kind of too heavy in one way and and that's kind of a subjective thing for me it's about a hundred short Delta's is kind of where I want to hover around and so if I need to find short deltas you can find short Delta's in other ways besides just selling calls in sp Y or call spreads you can find those in other underlyings but that are correlated to the spot yeah and they don't even have to be positively correlated like throwing on a bearish position and a positively correlated underlying to SP why well of course bring your your beta weighted don't do down but you could also do the inverse you could do bullish positions in an old or TLT and you can get those same directional deltas that you need in your overall portfolio in a different way right so another reason why we use SP y and y SPI is such a great instrument is because of the liquidity factor so I think this is something that kind of gets put on the back burner it's not really something that we talk about but it is one of the main reasons why why we choose SP why to manage our deltas because if we know that SP why is one of the most if not the most liquid instrument out there when it comes to the equities if we're able to really put on any sort of strike that we want mm-hmm right away and get a fair price for it because we only have penny wide or two penny wide bid s spreads with SP why even if we go really far out like between one and two standard deviations it's still gonna be that liquid that's a good sign of an instrument that we can use because sometimes I might not want to make a big adjustment in my portfolio maybe I just want to hedge my deltas by five or six so I can look at maybe selling a very far out of the money option or spread in SP Y where if I was using a different underlying that wasn't as liquid I would probably have to stick closer to this current stock price which is usually where the liquidity is but when we use something like SP Y where we know that all the options that we're looking at are gonna have tens of thousands of open interest thousands of volume for the day it really gives us a good environment to be able to really do whatever we want and whenever we want yeah exactly and that's kind of why you see us always trading in these the major ETFs by the Q's IWM is because you can even with low volatility the the options are so liquid that you can you could pretty much do anything you want if you're selling premium or buying premium either way it's just so easy to get in and out of those positions that it's not you don't have the risk of not being able to get out right so what would something like this look like so let's go through a few hypothetical situations so let's assume that I have a bearish assumption in the market and let's say that I have 10 trades on that are all short premium so given this information and let's say my Delta is pretty neutral but I want to bring it down a little bit more and let's say the VIX is pretty low the VIX is at 11 right now so let's say that all these things are true and ultimately I want to hedge my portfolio and really put on a position that would give me the ability to number one hedge some of my Vega that I have but also bring my deltas a little bit lower so for me my first instinct to place a trade in something like SP y is going to be something like a poor man's covered put so if I were to do this especially in sp why it's going to hedge my Vega exposure because I've got a ton of Vega exposure if I'm short all premium in my account so a poor man's covered put is actually a long Vega trade because we have a long option that's further out in in expiration and we're selling an option that's a little bit closer but the net difference in Vega is actually positive so if I have a 10 different short Vega trades and I can throw on a long Vega trade it's going to help me hedge that out and balance that out a little bit and since it's a poor man's covered put where I want the underline to go down it's also going to give me a negative Delta so this is an example of something that we can do using s py and when I say my Delta is pretty neutral I'm really talking about my portfolio beta weighted Delta and that's another thing that I would like to talk about so when we're talking about our portfolio beta way to Delta we're really taking all the underlyings that we have and if we think about it from a high school math scenario we're basically taking the denominator of all those equations and replacing it with s py yeah so ultimately we're just comparing apples to apples or giving ourselves the ability to get as close as we can to comparing apples to apples and looking at the delta from that perspective without doing that it's hard to compare a you know if you're long a 13 dollar stock in your long a 50 dollar stock it's hard to put those on the same playing field without having you know that beta weighting because what you know one is so much larger than the other and the same thing is with with options is that you know if you've got an iron Condor in the spy that's gonna be a way different Delta exposure than an iron Condor in you know a smaller stock like Best Buy or American Airlines you know that's a $40 stock compared to something that's $200 stocks so there's there's just you need that common denominator so that you can put that all together yeah and especially being an everyday trader trying to get in and get out in an efficient manner when you see your beta weighted Delta being whatever it is maybe it's negative 20 maybe it's positive 20 when we place a trade in a different underline that's not SP why our Delta is going to change probably a little bit differently than we might think but if I'm placing a trade in SP why and I know that my portfolio is beta weighted to SP why it's going to be a lot more accurate from that perspective so if I'm negative 20 Delta's that's beta a.22 SP why and I put on a positive 20 trade in SP why my deltas should flatten out pretty accurately sure whereas if I was trading something else that might have a negative correlation to it I might actually get more bearish in that sense so using SP y is definitely a good instrument when we're talking about managing our Greeks not only our deltas or in the overall portfolio sure so we'll talk about it another scenario so let's say I have a neutral assumption so now let's say I've got a mix of long and short premium trades and the SP just dropped 5% so we had a huge move the VIX went from 11 to 20 so now I'm in a scenario where I'm probably gonna see some winning trades especially if I've got a mix of long and short premium trades I'm probably gonna see some winners probably going to see some losers so if I'm going to experience this kind of move and if I was neutral if my Delta was neutral if the stock price actually comes down or the market actually drops where all of my put side strategies are now going to be much stronger in terms of positive Delta and all of my call side strategies are going to be pretty much out of the money and those are you probably going to be the winning ones especially if I'm selling calls I'm gonna have a scenario where after the market drop my portfolio is probably going to be bullish and we have to remember that Delta's do change so even if I'm neutral and let's say I've let's say I've sold strangles all strangles even if my adults is neutral if the market drops 5% all those puts are going to be much more positively Delta and his calls will the Delta will decrease on there so you'll lose on the short side on your short calls and gain on your long positions here you're picking that up as you go down and this the same things true as you go up and that's kind of why we try and stick to a level of Delta that we're comfortable with because that kind of can dictate what our trades are doing in the future so if we if we're at a hundred Delta short Delta and and the market goes up a little bit and we gain twenty twenty long Delta or you know down to eighty short Delta as we're going up we're gonna sell some calls into that to kind of hedge that that move so that you're keeping it overall you know comfortable Delta as we as we move yeah absolutely so when I'm looking at a situation like this number one I'm going to check my portfolio and probably manage the winners that I can and after that I'm probably going to be pretty bullish if my assumption is true and and all of my bearish trades are going to be profitable if I'm taking those off it's just going to leave me with a bunch of super bullish trades at this point so maybe I'll look at bearish short premium trades in a market like this so if I'm super bullish I can throw on some short premium bearish trades that will not only help hedge my portfolio Delta so maybe sell a call spread in sp why or sell a naked call on SP why if my Marten if my account is big enough and what that'll do is number one it'll help hedge my deltas and number two it'll help actually hedge my Vega exposure as well because if I was short premium trades when the market when the VIX was at eleven and now it's twenty those short premium trades are going to be trading for a lot higher value than they currently are so if I'm able to get into a market when the volatility is high and hopefully I see a reversion back down to a more normal level from the year that gives me the ability to actually hedge my Vega exposure as well even though I'm getting short premium in that in that sense sure so there's a lot of different things that we can do but when you look at an instrument like s P Y and looking at that instrument from a portfolio management standpoint you can see that there's a lot of different things that we can do and we can literally manipulate our entire account by just using one instrument that's going to be super liquid easy to get into easy to get out of for a fair price so let's get some takeaways and we'll talk about a potential trade that I'm looking at in my account so Sui is a great hedging tool as you can see there's plenty of reasons why we choose SP Y as our general market indicator and why it's such a powerful tool from a tasty works perspective because our account is automatically beta weighted to SP y so naturally if we use SP Y as our Greek hedging tool it's going to be a very accurate way to do so and liquidity is king so again it's something that we don't really talk about but it's super important to be able to get into a trade and get out of a trade and be able to make micro adjustments to our portfolio whenever we want to and at a fair price and I think if we were to use something else and maybe something that's super highly correlated to SP Y but not as liquid I don't think it's going to be as an efficient tool especially because of all the things that we talked about like our portfolio automatically being beta weighted to SP Y and again we need to realize that the stronger our exposure is in any Greek the more risk we also hold so if I'm holding a position with all short premium trades sure if I see a huge vol contraction then I probably see a lot of profit but that also means that if we see a vol expansion I might be in trouble so keeping our deltas and our theta and Vega levels at a more normal level is really what we like to do and that's why we like to be pretty delta neutral and just make sure that our Vega doesn't get too out of control with a lot of short premium trades so today's trait that I was looking at was in sp Y and of course since you're on the show it has to be Brooklyn butterfly love that and I was looking at an SP Y Brooklyn butterfly using calls so I actually did not put on the strikes here I'll add the strikes for the archived segments but I'm looking at buying the 2:31 call selling two of the 233 s and then buying one of the 238 so I really like this specific trade for a few reasons it hedges a lot of my things in my portfolio but ultimately what it does is it hedges my poor-man's covered put so the very first trade that I put on in my portfolio was a 233 long foot and a 222 short put in sp Y so ultimately what I'm looking to do is create a scenario where I'm going to be using a different expiration than the regular March expiration which I'm in in my long option but what I'm looking to do is create a scenario where if SP Y actually goes to 233 I want to have a scenario where I'm gonna be making money on a different trade but if it actually goes down which is what I want to happen with my Foreman's covered put that I actually make money as well and so this is the perfect strategy in doing that because as you can see by this risk profile graph if I route this for a 10 cent credit ultimately if SP Y stays below my strikes I'm able to keep that 10 cent credit but if it does go up to 233 which is exactly where my long option is in my poor man's covered put iuck stand to make two hundred and ten dollars maximum on this trade which would hedge a great deal of my loss that I'd probably see on my poor man's cover put cool so again this actually does complete the back wing trade too because I have a broken wing butterfly on the Q's awesome awesome so it's I think I'm gonna be doing that in IWM if you look at all the rest of the ETF's IWM has the highest volatility in all of them so it's actually down in the day so I think when you call on the put side nice I like it so yeah I'll be looking at adding a little bit of negative Delta by routing this trade completely hedging or hedging a lot of my poor man's covered put risk exposure and getting myself a scenario where if sby does come down I still stand to make that small credit that I would receive from routing this trade but I would likely probably close this at about a dollar if I can get a dollar out of this trade I think that would be fair especially because with these sorts of strategies we're not really going to see that max profit until we get much closer to exploration definitely so yeah I will throw this on the follow page as well as the taste works follow page and my Twitter account as well I am at tasty trader my keys at Trader Nicki bat thanks so much for tuning in we've got where do I start one on one coming up next though stay tuned Brittney and Jim are coming right in what up everybody I hoped you liked this video click below to watch more videos subscribe to our Channel and don't forget to check out tastytrade.com [Music] [Applause] [Music]

Channel: tastytrade

Views: 6,234

Rating: 4.6571426 out of 5

Keywords: trading, trader, stock, market, finance, learn to trade, beginner trader, options, options trading, tastytrade, profit, trading tutorial, investing, how to trade, portfolio management, SPY, Hedging

Id: TA0n0m5QIGM

Length: 17min 57sec (1077 seconds)

Published: Wed Mar 22 2017