# Parcel of shares to short



## DaveK (27 February 2020)

Hi guys

I’m new to these forums.
I’m looking at buying some put options to hedge my assets during this possible downturn.

if there were an insurance policy that covered you against the economy crashing I’d buy one.

The idea came to me that I could buy some puts on a parcel of companies that were more vulnerable to economic crashes.   Qantas perhaps or JB HiFi.  

Can anyone suggest any other stocks? Or is there merit in just buying XJO puts?  
Any advice would be much appreciated.


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## fergee (27 February 2020)

DaveK said:


> Hi guys
> 
> I’m new to these forums.
> I’m looking at buying some put options to hedge my assets during this possible downturn.
> ...




Hey @DaveK  welcome to ASF, first post I see  nice 

Have you used options before?

Do any of the stocks in your portfolio have options available?

There are a lot of options strategies when using options it depends on exactly what you want to achieve. 

Do you want a high delta hedge neutralising loss's or do you want to try and make more than what you are loosing on any market drops coming out ahead as opposed to neutral ?

Theres a lot of chat in the "corona virus" and "retail reckage threads" that's worth reading in regards to stocks to short. So maybe a good idea in the mean time to read up first then come back and see what other members think if/when they post up here


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## DaveK (28 February 2020)

fergee said:


> Hey @DaveK  welcome to ASF, first post I see  nice
> 
> Have you used options before?
> 
> ...



Thank you for the advice Ferge, I'll definitely look at that.  The assets I'm protecting are non stock assets like investment properties etc.  so i'm just trying to hedge my current wealth against a severe downturn.

I have a lot to learn, I'm going to use an advisor to help me pick and execute the Put purchases.  The idea is to choose stocks that are in the consumer discretionary sector and to neutralise losses in asset values in the case of another GFC scenario.  I figure this sector falls the worst in financial crisis.


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## MovingAverage (28 February 2020)

fergee said:


> Hey @DaveK  welcome to ASF, first post I see  nice
> 
> Have you used options before?
> 
> ...




In case you're not familiar with it, take a look at  shortman.com.au 

I find this website useful to see what the shorters are up to. Might give you some inspiration for shorts


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## tech/a (28 February 2020)

*Just short the/an index.
*
Shorting any of the borses lately has been absolute 
money for jam!!
Currently short the DAX which I have a trailing stop I adjust 
from time to time.Currently 12500 (Stop)


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## Sharkman (28 February 2020)

implied vols have already spiked. that's not to say that they can't go higher in the coming days/weeks, but they are already significantly above historical averages. as of a few minutes ago, looking at the May ATM XJO puts (6450 strike) shows an IV of ~22.5, the May 25'ish delta XJO puts (6000 strike) are ~25.5. from what i remember, XJO IV normally hovers in the 10-12 range, though i don't regularly trade index options so maybe someone who does can correct me as needed.

as such, more vega neutral strategies like collars and bear put spreads would seem to me to be worth considering over outright long puts, though even those will be quite costly to put on - the May 25'ish delta XJO calls (6800 strike) are at an IV of just 15. that is a massive double digit 25 delta risk reversal, making it really tough to do a collar in my opinion.

bear put spread seems a bit better as you get that delta skew working for you rather than against you, but of course that will only provide protection down to your lower strike, 6000 in this case.

however as of the moment i write this, a certain phrase involving a horse and a barn door springs to mind. in my view anyway.


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## aus_trader (1 March 2020)

Especially after a severe down week, it'll be quite expensive to buy put options as Sharkman said in more detail. There might be some stocks that may offer reasonably priced options that you can still purchase.


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## DaveK (1 March 2020)

Thanks heaps for all the responses.  The sad thing is that I wanted to do this 2 weeks ago and it's taken this long to get an account open!  What are thoughts on buying some QAN puts?  Historically the share price gets hit pretty heavily in downturns.  If this crisis bites no one will do much flying.

Again this is just to hedge my position.  If the market bounces back I will be happy that my put insurance premium helped me sleep at night.


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## tech/a (1 March 2020)

One of the sectors getting smashed 
Will be slow on the turn around in my view


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## fergee (1 March 2020)

DaveK said:


> Thanks heaps for all the responses.  The sad thing is that I wanted to do this 2 weeks ago and it's taken this long to get an account open!  What are thoughts on buying some QAN puts?  Historically the share price gets hit pretty heavily in downturns.  If this crisis bites no one will do much flying.
> 
> Again this is just to hedge my position.  If the market bounces back I will be happy that my put insurance premium helped me sleep at night.



I find when I am too leveraged to sleep at night it usually means Ive bitten off a bit more than I can chew. 

Buying QAN puts to hedge right now is not the right move IMO you are too late for this part of the move down maybe a dead cat bounce would be better timing for this strategy. 
I would be selling deep out of the money long term puts and be happy if I got to buy them at that strike price. Just my 2


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## DaveK (1 March 2020)

Sharkman said:


> implied vols have already spiked. that's not to say that they can't go higher in the coming days/weeks, but they are already significantly above historical averages. as of a few minutes ago, looking at the May ATM XJO puts (6450 strike) shows an IV of ~22.5, the May 25'ish delta XJO puts (6000 strike) are ~25.5. from what i remember, XJO IV normally hovers in the 10-12 range, though i don't regularly trade index options so maybe someone who does can correct me as needed.
> 
> as such, more vega neutral strategies like collars and bear put spreads would seem to me to be worth considering over outright long puts, though even those will be quite costly to put on - the May 25'ish delta XJO calls (6800 strike) are at an IV of just 15. that is a massive double digit 25 delta risk reversal, making it really tough to do a collar in my opinion.
> 
> ...



Sharkman, with the implied volatility almost double what it usually is, how is that generally reflected in the option price?  It wouldn't cost twice as much would it?


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## Sharkman (1 March 2020)

DaveK said:


> Thanks heaps for all the responses.  The sad thing is that I wanted to do this 2 weeks ago and it's taken this long to get an account open!  What are thoughts on buying some QAN puts?  Historically the share price gets hit pretty heavily in downturns.  If this crisis bites no one will do much flying.




you're right, but the MMs know that and they will price the options accordingly. i didn't check QAN options when i wrote my last post, but the index option IVs are already sitting low-mid 20s, so if anything QAN options will be higher than that.

furthermore, what the raw numbers don't show is that in times of uncertainty and volatility, you are much less likely to get filled at the mid. the MMs will make you cross more of the spread, especially on OTM puts as they know everyone is trying to buy protection in times like these.



DaveK said:


> Again this is just to hedge my position.  If the market bounces back I will be happy that my put insurance premium helped me sleep at night.




it's very expensive insurance if you buy it now. you may look at the ask prices on those puts when the market opens monday and still feel it's worthwhile insurance, that's totally up to you. i can't tell you that you're wrong because everyone has their own risk tolerances. but in my view the horse has well and truly bolted by now, if you didn't buy puts a few weeks ago when the IVs were low-mid teens, it's too late to be doing so now and you'd be better off just waiting it out, maybe even selling some OTM puts as fergee suggested to make use of those high IVs. that's what i'll be doing, i didn't buy any protective puts either when they were still cheap.


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## Sharkman (2 March 2020)

DaveK said:


> Sharkman, with the implied volatility almost double what it usually is, how is that generally reflected in the option price?  It wouldn't cost twice as much would it?




it's not a linear relationship. i don't know the equations off by heart, because frankly it's not necessary to know the exact formulas in order to trade options, just the general principles are sufficient. typically implied volatility is used to compare against historic volatility of the same asset, against the implied volatility of a different asset, or against the implied volatilities of different options on the same asset at the same point in time (this is what's commonly referred to as skew - as i did above) rather than being used to compare against the option prices themselves.

the other thing is that implied volatility is not directly observable - it needs to be backed out from the option price and a few other factors using some sort of iterative algorithm like a Newton bisection. as such, it's a somewhat theoretical measure of what market is thinks the annualised 1 standard deviation movement in the asset price will be, as it's forward looking and assumes that market outcomes will follow a Gaussian/lognormal distribution. so i guess that's part of the reason why you don't normally compare it to things that are directly observable, like option prices.

at ATM doubling the IV will roughly double the option price but as you move further OTM, a move in the IV can impact the option price by a much higher multiplier, because what was previously 2+ SD move under the original IV could become a 1 SD or less move under the new IV.

take the 6000 XJO May puts from earlier in the thread. at a 25.5 IV those were priced at about 130 points when i checked the market on friday. pricing them off a 12.5 IV results in a theoretical price of about 20 points. this can be explained by backing out the Gaussian outcomes under both scenarios. a 1 SD move under a 12.5 IV is about 6060-6840 (this is derived by interpolating the IV over the square roots of the business day counts). a 6000 strike is outside that 1 SD range. when the IV spikes to 25.5, a 1 SD move becomes approximately 5640-7250, and now that 6000 strike is well within 1 SD, so the probability of exercise (and hence the option price) rises exponentially. that 1 SD level is key because the probabilities change dramatically once you cross it in either direction.

but past a certain point, an increased IV will start having less and less of an effect on the option price because when it gets so far OTM, even after the IV spike it would still take more than a 2 SD move to hit that level.

the above is probably not completely correct to the letter, i'm not a quant, nor have i studied any maths beyond the old 4 unit in high school back in the 90s, so if there are any quants around here, i certainly wouldn't mind being corrected. but as i said above, i don't think it's really all that necessary to know the exact maths behind it to trade options, a solid understanding of the concepts should be sufficient.


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## joeno (2 March 2020)

I was planning to purchase SPY/XJO puts in the last Monday but decided not to given the VOL - but looks like it would've been worth it. Wondering what's everyone's play Monday? I'm all longs. With particular large holdings in Iron Ore.


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## Sharkman (2 March 2020)

Sharkman said:


> you're right, but the MMs know that and they will price the options accordingly. i didn't check QAN options when i wrote my last post, but the index option IVs are already sitting low-mid 20s, so if anything QAN options will be higher than that.




just quickly ran the numbers on the QAN May options now that the market is open, out of curiosity more than anything as i don't think i'll be trading any. as expected they are way higher than the XJO. with the underlying at 5.20:

4.50 puts (~24 delta) the MMs are showing 0.17/0.24, that's a 50 IV at the mid. in other words the stock would have to drop to ~4.30 by May 28 (a 17% fall from current levels) just for these options to break even - if you think it's likely to fall by more than that _in that timeframe_, then you can probably justify to yourself buying puts even at these IVs.

side note - at a 25 IV, the theoretical price for the 4.50 puts would be 0.035.

5.25 puts (approximately ATM) the MMs are showing 0.43/0.53, that's 44.5 IV at the mid.
6.00 calls (~25 delta) the MMs are showing 0.10/0.17, that's a 39 IV at the mid.

so that gives a 25 delta risk reversal of about 11 (puts favour calls of course, as is the case 99.9% of the time). honestly i expected it to be much higher than that (maybe 20-25), given the overwhelming majority of pessimists out there at the moment, some of whom may have become put off by the high IVs and instead are selling covered calls, flooding the call side with volume and bringing prices down.


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## DaveK (2 March 2020)

Thanks sharkman.  Yes I see that buying QAN puts are pretty expensive.
I actually don't hold any stock at the moment, my money is tied up in realestate.
I have a bit of cash reserves to survive on if things go really pare shaped. 
I have minimal borrowing but I want to hedge.  If the market really dives, I could lose
my job so in increase in value of puts could help.  Expensive insurance but if I don't have
it, it could be much worse


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## DaveK (2 March 2020)

So I'm thinking of buying say 25 xjo puts expring around June strike price 5800.. around 40K but at least if the market really tanks and jobs are lost, I can survive.


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## Sharkman (2 March 2020)

i personally think option prices are way too expensive right now especially on the put side given the high risk reversals. but i can't say that you're right or wrong to do so, everyone's circumstances are different. there are a couple of things i think you should at least consider first though if you're thinking about outlaying that sort of premium.

what is the correlation factor? you are hedging what i'm guessing are direct real estate holdings using an equity index derivative. under normal circumstances the correlation isn't all that high between those 2 asset classes, but in the shadow of something as widespread and indiscriminate as this, that may serve to push up the correlation factor. you might want to do a bit more research here, i don't know the answer as i'm 100% equities so i've never had to consider that. you may find higher correlation factors and hence a better hedge in something like a REIT index or REIT derivatives, or maybe CBA/WBC options given the heavy exposure to retail mortgages of those banks in particular.

if you are going to stick with XJO puts, what magnitude of fall are you looking for? buying low delta puts only makes sense if you're looking to guard against a huge blowup to perhaps sub-5000 levels, as your breakeven is all the way down at 5640. maybe you are, but considering that the XJO 25 delta puts were trading at a >30 IV this morning (they may have calmed down a bit since as there's been a bit of a rebound today), it may be worth looking into things like a 6300-5800 bear put spread to mitigate some of the decay, at the cost of capping your protection. or possibly selling a 6500-6800 call spread against it to fund most of the costs of the puts, if you don't mind taking a loss on the hedge should this thing miraculously blow over in the next few months.


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## tech/a (2 March 2020)

So the DJIA during Friday Trading was down 1000 pts and finishes down 350 ish
XAO was down 200 points now down 50 pts.

So who' s controlling what?
Ive closed my DAX short.

Yes long now at 12003


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