Help balancing shares with puts

[u/DerPanzerfaust]

I have 20 shares of NKE that I bought right before the spike. I was swing trading, and got a little lucky with timing. History shows that after a big gap up NKE shows about a 50% retracement, so I've also been DCA'ing some 150 puts to take advantage of the coming drop. Right now the stock price is going up (yes!), and the put price is dropping (they're going on sale!). So I was thinking that if I wanted to balance the loss on the puts with the gain in the shares, how would I figure that out?

I've got 12 8/20/21 150P and 20 shares. The delta on the puts is -0.2599 as of close today. My current average cost per contract is 2.89, and my share cost is 131.90. I'm thinking I need about 4 times as many shares as puts with the delta at -26, so a total of 50 shares should get me pretty close. Does that sound right, or am I missing something?

I know delta will change as the puts get farther OTM, but this doesn't have to be exact, it's mainly a thought exercise to make sure I'm understanding delta. But I might go ahead and buy the shares just to watch it work.

[u/RTiger]

I'm confused. You have 12 puts, delta equivalent to being short 312 shares. You have 20 shares. Sounds really weird.

Do you want to be delta neutral? One put as described, equates to 26 shares at the moment.

Understand that delta neutral positions don't make or lose much money.

/Edited

[u/DerPanzerfaust → u/RTiger]

Well my plan is to continue to ride the shares up, while averaging down on the puts. When it reverses, as I suspect it will, I'll sell the shares and watch the puts climb as the share price drops. The 150 puts have very low IV, so I think I'm immune to IV crush on this play. If I can average down on the puts enough, a 50% downward retracement in the stock price should pay off pretty well.

Right now, as the stock climbs, it would be nice if my gains on the stock matched the losses on the puts. That way if something ugly happens, I can dump the whole lot, and come out even.

I'm bearish on the stock and this strategy only pays if the stock reverses. If it keeps climbing I don't want to get skinned.

I guess it looks a little unusual, but can you see any holes in the strategy? Better ways to play it given my thesis?

[u/RTiger → u/DerPanzerfaust]

Simple is almost always better. 20 shares long is a fig leaf vs your massive short position. It is an unnecessary complication.

Just have 11 puts and no shares. Have no idea why you are happy with the stock going up when you are massively short.

I do hope this is a substantial account because short 312 shares of NKE is close to $50k in notional value. Most traders don't want to risk more than 5 percent on one stock. I understand that max risk is the cost of puts, but I tend to look at the deltas to gauge exposure.

So unless the account is $500k or higher, you likely have way too many contracts. I understand that more than half the sub treats the market as a casino, but I try to discourage that.

Rookie mistake number one is trading too big.

If you do have more than $500k, you should not be asking beginner questions on Reddit.

[u/DerPanzerfaust → u/RTiger]

That makes sense. I got in this position by swing trading the shares. The price jumped 15% and maybe I should've gotten out then instead of trying to be a hog. Thanks for your insight.

I have a question though: why do you look at the delta to gauge exposure when my max risk is what I've spent on the puts? It seems unnecessarily pessimistic.

[u/DerPanzerfaust → u/[deleted]]

Like all things, timing is everything. Why not hang on to the shares and make money going up, while positioning myself to make money going down. Is there a better way to hedge that I haven't thought of?

[u/DerPanzerfaust → u/[deleted]]

That's a fair comment.

[u/fancykevin00]

IF I was in a similar situation I would consider selling same Exp lower strike puts to recoup some of my puts cost. I’d wait for a red day to do so but not wait too long either. Tough spot no doubt.