Looking for Feedback on Portfolio Risk Management Strategies

Subtitle: I don’t know everything and I’d like some help.

With volatility at seemingly historic lows, it feels to me now is the time to start thinking about putting on some cheap insurance.

Cheap insurance isn’t available when your house is on fire.

Yesterday, I bought some far out-of-the-money 5 delta calls and puts in $QQQ in March, April, and May. But the more I thought about it after the market closed, the more I thought these positions won’t really help me unless we get a DISASTER.

Of course, it’s always good to be protected against disaster, but I’m now thinking I would like to additionally protect myself against more likely adverse moves.

I’m thinking about putting on at-the-money straddles in $SPY back months (April, May) and gamma scalping the position as the market moves up/down.

How I would gamma scalp:

I’d make one daily adjustment to the position. I would either roll the in-the-money call/put to the new at-the-money strike for a credit, or in the case of retracement, I would roll the now out-of-the-money call/put to the new at-the-money strike for a debit.

Example:

Let’s say I start out long the SPY April 234 straddle (long 234 call, long 234 put) today and I paid $7.50 to put it on.

If at tomorrow’s open SPY opens at 236, I’d roll the long 234 call to 236 and collect roughly $1.

The next day, if SPY opens back at 234, I’d roll the long 236 call back to 234 for a 75 cent debit.

Net, I collected 25 cents and I’m back to my original position (now 25 cents cheaper).

I’d do this daily until the options expire. In the event nothing major happens (the reason for the protection), hopefully this system of gamma scalping will have made a significant dent in the premium I paid to originally put this position on, meanwhile the rest of my short premium and roughly delta neutral portfolio would have performed well and made me far more than the money lost on this insurance play. In the event we did have an outsized general market move, this insurance play would yield profits that would offset a meaningful amount of losses elsewhere in my portfolio.

Two unanswered questions in my head:

  1. Does this strategy make sense and will it help me the way I think it will?
  2. If the answers above are yes, then what is the proper size of my account to allocate to this strategy? 5%? 10%? 25%?

If anybody can offer any insight, I’d welcome your thoughts.

Thank you,

Sean

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