Between 3/22/2024 to 4/22/2024 expirations, I am going to add a small tweak to my trading. This is based on some thoughts I had for a while and questions that come up from members all the time.

As you know, my trading style involves choosing a directional bias on the markets first, and then taking trades in that direction using debit spreads. eg I am bearish on the markets and so I took a DIA 190-189 put spread on Thursday. You already know the basis for this – ‘a rising tide lifts all boats‘ (except we had NVDA and META which literally did ‘a rising boat lifts all tides‘ recently) The problem I have been facing for some time is that in this inflation news driven environment where we keep getting CPI, PPI, PCE, GDP, Jobless claims etc. on a weekly basis, technical analysis becomes unreliable. You could take trades based on your thesis and they may start going in your direction initially, only to find out that some CPI surprise comes out and markets completely reverse course putting all your trades in danger. Here is the tweak I am going to apply for the trades in the next 4 expirations:

  • In the above example, if my directional assessment was right and DIA keeps dumping, I don’t have to do anything and I will continue trading as usual.
  • On the other hand if X days (let us say 3 days) after opening my trade, DIA spread loses Y% (let us say somewhere between 5% – 10%) of its value, I will take a DIA call spread instead to hedge that position. If done right, only one trade will become a loser (as you will either be right or wrong on direction). The X and Y are to be determined (and that is why this is an experiment)
  • Of course, I fully understand that there will always be a no man’s land but I am assuming it will be mostly outliers and not the norm. eg. I have a DIA 390-389 put spread, and DIA starts going up to 395 and my put spread has lost 10%, I then add a DIA 395-396 call spread, leaving me with a no man’s land between 390-395. So, if DIA expires between those 2 numbers I lose on both ends.
  • The tricky part is to know when to take the opposite trade? I can‘t wait too long for this, as waiting too long makes that no man‘s land between my call spread and put spread larger and larger. On the other hand taking the hedge too early will mute my profits unnecessarily. eg. If DIA opens at 392 on Monday, and out of panic, I jump at 392-393 call spread, and then DIA reverses back below 390, I jumped at the hedge too early and it wasn‘t even required.
Hope that makes sense? I will be labelling these trades as ‘experimental hedge‘ to make them clear and I will only do it for 1 month and all the results will be in front of your eyes.