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Hybrid Short Call Pairs Trade

One of my favorite strategies during bear markets is using short calls to offset the long deltas of the positions that got hung up during the initial descent into a bear market. Small variation from simply adding short calls using the same security.

For example, I nearly always have some leg(s) of a covered strangle out typically in IWM, sometimes SPY. Currently, it’s IWM.

While I continue to manage the position according to my plan, I’ll add some short calls -in a highly correlated product that I assess as weak and anticipate a downmove.

This is a bit of a hybrid trade, particularly the role it plays in my portfolio. I don’t treat it as a standalone speculative short, however the trade is managed disparately from the deltas being offset.

For example, as energy began rolling over, I assessed the correlation between XLE and IWM across several timeframes, and found it would be a viable match to fade the near term fall. With elevated IVR, I used 20-30 DTE short calls at 0.35 deltas to establish the position.

This style of trade accomplishes (2) things:

1. Allows for speculation, sensitive to current market conditions. I scan and structure high probability trades to take advantage of current market opportunities. 2. Decreases overall portfolio directional risk when paird to an existing long delta trade. I can win (or lose) on both trades, so this is not a firm hedge, but does offset risk if my analysis is conducted correctly.

Relatively simple hybrid short call pairs trade that I’ve had success with particularly in bear markers and corrections.

Do you have any similar style pairs trades that you like to do?

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