A most basic question about the most basic of options

CCs are synthetically the same as short puts - which have higher premiums due to the vol smirk. You're also tying up a lot of buying power with stock, which is completely unnecessary if your thesis on QQQ is correct.

 

Others have said it I'm sure, but sell covered calls to hedge instead of buying puts. Use time decay to your advtantage

 

How are covered calls a hedge against a market meltdown, which is what the OP was asking about?

 

Yeah, no actual hedge in selling CCs...i guess you just have to aggressively sell and roll on the way down, but youre still stuck with the shares. I vastly prefer the poor man's covered call for this reason...

 

In the case of a crash, you won't be able to roll. The OP's scenario was the Qs crashing 100 points... any ideas about what happens to the delta of that call? Given that the stock is crashing at 100D, that would put him at about a $10k loss. Good luck rolling out from under that.

Same deal with the PMCC; you will not be happy with the value of your long call (again, consider what happens to it in case of a 100-point crash.)

CCs/PMCCs are a strategy where you're projecting anything from a minimal drop to a slow rise in the underlying; they're a dumpster fire in a crash.

 

I'm also confused how this is some sort of hedge. But I find these "use theta" to your advantage statements some sort of blanket statements that make absolutely no sense on its own.

In the end scheme of things, the PRICE is what matters. Or you'd be an idiot to take the long side if 'using time to your advantage' truly had some mystical properties.

Taleb & Paul Tudor Jones cashed out generation wealth during Black Monday using different techniques.

In the first, Taleb had no idea when the next crash was to occur. However, he continued to drive his STEAM-ROLLER around the floor and waited for those 'THETA' boys to dance around trying to pick up nickles infront of his steamroller. Though in this case, Taleb kept tossing down pennies instead of nickels as he accumulated far out of the money options at very cheap discounts. With confidence high, traders couldn't resist at that time, especially in the forex markets.

Down in the futures trading pits, Paul Tudor Jones had his boys short the shit out of the markets, as in this case he 'knew' the crash was coming as he saw the same signs from past history emerge. No one laughed at him, only because he did it in secrecy. In fact, he paid his boys to mix (bogus) long buys with his short positions in order to mask the large short-positions he was accumulating. Paul also does not set active stop-losses as a failsafe to prevent competition from reading his moves and shaking him out.

You won't time it like Tudor Jones, but you can certainly hedge like Taleb when the premiums are cheap enough....

 

Interesting. I was not trading the PMCC during the March 2020 crash, so I could not track the liquidity of the long leg. I personally buy the LEAP at 80 delta +/- and my "crash" plan is to sell it when it approaches 50 delta (max extrinsic value) and sit on the sidelines. But I cannot say that I've executed this during a panic. Seems like there is always a market for a 50 delta call, right?

I'm actually worried that I won't be able to easily buy back a nearly wothless deep OTM short call during a crash. If I can't buy it, then I will be unable to sell the LEAP! (I don't have the ability to trade naked short options)

If worst comes to worst, the LEAP value goes to zero. I'm about 55% cash at any time, so I will live to struggle on

 

Yeah the premiums look awfully cheap now. Any idea what kind of DTE Taleb's puts were?

 

You'd be able to sell your LEAP; just spread the short call off with a cheap FOTM long call. But your LEAP won't be worth much in that crash scenario, even if volatility spiked way up (which it would, in a crash) and you caught it at the peak. E.g., a 298d/80D QQQ call is about 75/share right now; if the Qs were to crash 100 points 200 days into it, and assuming the IV spiked to somewhere from 50-100, that long call would be worth from 15 to 44 - a loss of 31-60/share. That's technically known as an "OUCH".

Anyway, CCs of any sort are not relevant to a hedging question.

 

Thanks, that is a helpful handy Cliff's Note on an options exam. If it ever comes up on multiple-choice answer, I pick that one!