Uneven Fly as an Insurance Hedge

It's been a while since i last posted. I've been rather lazy of late but since i've promised Decipher on the tagboard that i'll post this, here it goes....

As many of my friends know me, i'm a perennial BULL. What do i mean by that? To put it simply, i SUCKS at picking bearish stocks. First of all it is counter-intutive. Secondly, a company is set up to make money not to lose money. In that case, what do i do when i feel that the market is gonna crash? When placed correctly at critical pivots or support/resistance, an uneven butterfly allows one to make 50-60 percent if market crashes. And when i say crash, i really mean CRASH.

what if i'm wrong?

What if it goes sideways or it crashes and rebound...... I'll make even more... up to 150-200 percent.

What if instead of crashing, it rallies? .... The fact is i couldn't care less, cuz.. it's an insurance! Remember, i'm long other stocks, i would have made more money on them to pay for the insurance premium.

Sounds Hocus Pocus huh? I've got a friend whom i've introduced this method to, who like it and have agreed to write something for me and i must say i couldn't have done a better job than him in writing this. So i'm present "Insurance to hedge against market crash" in all splendour and glory written by my dear friend, Sweeleng:

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Insurance to hedge against market crash

I believe most investors were hurt by the “market correction” in May after FOMC announced that interest rate hikes might not end so soon. After an euphoric bull run up since the start 2006, the decision resulted many investors to take profits which caused DOW, S&P and Nasdaq to give up their gains for the year and even dipped below the 2006 opening. How can a trader guard against such sudden market correction?

The below shows one possible way option traders can hedge against such risks., that is to enter a uneven butterfly on the major indices (ie DIA, MNX, SPY or SPX).

This trade was entered after the initial correction but as market is still volatile and unstable, a MNX 150-152.2-157.5 Jul06 uneven butterfly was entered to hedge against further downside risk. The sweet spot is placed below the index (near the support) such that should the market continues its downward movement, we would stand to gain and even if there’s a strong downside correction we are protected.

Since this trade is meant to be a hedge, one can expect to lose the entire trade since it’s a form of insurance meant to compliment your overall portfolio which might have a bullish bias. Hence, if you find that your overall portfolio’s delta is too high, this trade can help to reduce the delta and hedge against market corrections.

Also, notice that the trade is theta positive, so even if the index is moving sideways, you can still take some profits.

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Nice, isn't it? ....

As you all know, the market crashed quite badly in Jun. Employing this strategy, it's amazing i did not lose money (considering the BULL i am) during that period while i was on vacation in U.S. .....................

In fact, i even made a little. :p

Till then...... Happy Trading and always stay hedged!