In my mind, the best hedge is the one you don't need, because when you do need it... it's probably too late. Therefore, this bot hedges first and then gets to work.
Keeping with the same theme as my other bots, this one is different than what I've seen shared thus far. This bot comprises two main components, selling a reoccurring daily PCS and opening a further dated PDS to cover the downside risk. We've seen firsthand the power of selling puts this year. The problem with this strategy is that when things gap down like they did this morning, you realize how much exposure you have.
A couple of months ago, I decided to start using this data to figure out how I could layer in some protection in the form of a protective hedge while still maintaining the profit potential if the market continues its steady upward trajectory.
Strategy Overview: Use shorter-term PCS to pay off the PDS, enjoy a situation of riding relatively risk-free after that.
- 10 DTE 20 Delta PCS gets open every morning at 9:45
- (1) 45 minimum PDS gets opened with a budget of $1000
- Long Legs for the initial PCS get matched to the Short Legs for the PDS.
- PCS's shut off if within 15 days of the PDS expiration date to avoid a situation of stepping on strikes
- PDS should close if all the PCS get wiped out.
- A numerical value for a rolling threshold is included to deal with the situation where the PDS becomes too far away to -effectively cover the outstanding PCS risk.
The PDS is paid for at this point, it took roughly three weeks trading two contracts, and I have PDS protection out to 10/15 if need be. To be completely transparent, this trial used a 60 DTE, but now I see the issue with gravitating too far away for the PDS, so I cut it down to 45 and implemented the roll threshold. Currently, the PDS for the original version is +420/-410, which is too far away from the current price to help actively cover any open exposure.
Although the original PCS used as a reference to place the PDS is now closed, the legs are still close enough to be effective for new positions.
Where do we go from here? Help me calibrate this idea. The best-case scenario is that markets remain bullish, and you're able to pay back the debt while generating net profits in the second stage of the process. If the market decides to head south, you at least have some bear backup to protect the open exposure and offset your losses. Finding the happy medium between position sizing and when to roll are the finishing touches.
As always, thanks for your thoughts and feedback, lets strengthen our bots together so a little downside action is nothing to worry about and we find ourselves always being the stronger position.