r/options
Am I on the right track to making a good hedge using this EEM broken call butterfly?
Author explores using a broken call butterfly on EEM to hedge against a drop to its 200-day moving average amid soaring IV.
- Fibonacci support at 62 may act as a pause point for any downward movement.
- Potential to retest the 200-day moving average at 58.
- Soaring implied volatility reflects elevated risk and uncertainty in emerging markets.
Put backspreads are my mainstay hedge but they're too pricey since IV has soared in emerging markets. So I'm trying an unfamiliar butterfly that's supposedly economical when IV is high.
The situation is I've got EM exposure that approximates 2800 shares of EEM and I'd like to protect it should it retest its 200d moving average (which would be at 58.) On the way down to 58 it may pause at a fibonacci support that's at 62, so that's where I placed the short leg of the butterfly.
I've read to roll into a new 21DTE fly when it reaches about 10DTE, so I was going to try that first. I don't really know how to place the long legs. I just played around until I got a combo that wouldn't immediately lose a lot of money on the slightest EEM uptick lol.
Sizing an SPX put backspread is a simple calc using the strike price and multiplier. I don't know how to use math to size this fly tho, so I simulated its payoff a week before expiry. The roughly $6500 payoff covers almost half the losses that would result if EEM did indeed fall that far. And that's good enough. And maybe it'll have to be, because look how many contracts!!
Rolling this thing frequently may kill me. But I know of no better instrument than EEM. Your thoughts?
Futures.
Not the time to buy expensive options.