r/options
Trying to understand protective puts
User questions why SMH protective puts yielded significantly less profit than IBKR stress tests predicted during a market drop.
So I have some OTM protective puts for my long positions I have on SMH. When the market dumped today, the puts helped, but not to the extent that I expected.
The pic attached is the stress test for end of day June 4 on top, and actual results on my SMH positions from TWS for June 5 on the bottom. The stress test calculated my protective puts as expecting to provide $29k of positive P&L in the event of a 10% drop in SMH. Well, SMH dropped almost exactly that much on June 5, and as you can see, my protective puts only provided $7,800 of positive P&L today. I'm probably missing something, and I'm hoping someone more knowledgeable than me can educate on why my actual result experienced such a large deviation from the IBKR calculation? I know that the IBKR calc uses a theoretical Black-Scholes pricing model, which will never exactly match actual results, but for actual results to be 4 times less than the calculation seems very off.
The stress test says volatility +100% which at least to me implies IV exploding and thus making the puts much more valuable in the test than what actually happened irl.
That makes sense, I did not take into account the volatility expansion assumption, thanks.
Stress test is right mathematically for the vol assumption it made but the test assumptions are wrong in first place. For the Aug expiry, low gamma puts - factoring 100% vol upside, vega and vaana will show that kind of PNL mathematically. On top of it if broker use BSM, it assumes constant vol surface.
In real-world a 10% drop in SMH will never expand the back-month, 75-day implied volatility curve by 100 absolute points in a single session. The front-month might spike by 10 or 15 points, but the back-month curve experiences heavy volatility dampening (the term structure flattens).
Is this by default stress test in ibkr ? Then it's really bad.
That looks like it is assuming volatility doubles (volatility +100% listed on the top as an assumption). Volatility did not double in SMH. Those puts were like $165 OTM at the start of the session. Not exactly what comes to mind when I think of protective puts.
That makes sense. I have these primarily for tail risk if things drop beyond -20%, not actually too concerned with today's 10% drop, was just puzzled on the difference from the calc.
the stress test number has volatility +100% baked into it, so it is showing you what those puts do if iv doubles on the way down, not what a calm 10% selloff does. friday was a telegraphed dump on the broadcom guidance and the jobs print, realized was big but iv didnt double, so your puts barely moved. the deeper thing is that puts 165 otm are basically a vol bet, not a price hedge. low delta means a normal 10% move hardly touches them, they pay off on a real tail or a vol of vol spike. if you want the put to actually track a 10% drop you need it closer to the money with more delta, and that bleeds a lot more theta to carry. cheap tail insurance and an actual delta hedge are just not the same trade.
The puts you bought were a great hedge for your underlying position as the delta on the puts was/is roughly the delta on the underlying.
Not so much for your call position as the delta on the call position was/is much higher. A good hedge for the calls without spending a lot on puts to to sell a higher strike call. In effect a debit spread.
Does the stress test adjust for remaining duration? If so, how?
This entire year and a half have been absolutely insane in terms of never allowing protective puts to actually do their job. There has been a concerted effort by the powers that be to NEVER allow negative gamma expansion in this market for over 1.5 years now. Every move down is somehow going at a snails pace, with constant 5 minute green surprise candles to break put pricing and shake people out of their stops. The only way you can make any decent money on down days is by being ITM but if you are ITM you are subject to a MASSIVE drawdown when the inevitable Trump tweet and algo pumping happens. I think being short futures is a much better hedge in this environment, options are just ridiculously manipulated to prevent anyone from ever profiting from OTM puts this whole last year and a half.
Hopefully this is paper trading? Thats wild if anyone with six figures in options on one ticker can’t understand this very simple position. The “stress test” is trash and should’ve been tossed the moment it’s given a quick look over…
SMH özelinde, yarı iletken sektörünün son dönemdeki güçlü kazanç raporlarına ve AI kaynaklı talep artışına bakarsak, OTM put'ların maliyeti ve getiri potansiyelini iyi dengelemek gerekir. Bu tarz bir korunma stratejisi, piyasa koşulları ve şirketin temel dinamikleriyle uyumlu olduğunda daha anlamlı sonuçlar verir.
say who?