Equity Hedging - A Simple Overlay System

Discussion in 'Risk Management' started by OddTrader, Dec 31, 2011.

  1. Closed above trade (around opening time; C2 Filled: 0.08 at 1/17/12 9:36 ET) 1X Jan21 SPY 125 Put @0.08, for a loss -$113.

    Bought (then immediately; C2 Filled: 2.37 at 1/17/12 9:38 ET) 2x Feb12 SPY 129 Puts @$2.37.
     
    #21     Jan 18, 2012
  2. Hold the current position above for another week .
     
    #22     Jan 23, 2012
  3. Hold the current position for another week .
     
    #23     Jan 30, 2012
  4. Reduced size to 1x by closing 1x @$0.26.
     
    #24     Feb 6, 2012
  5. http://www.elitetrader.com/vb/showthread.php?s=&postid=3444575#post3444575

    From now on this Equity Hedging system will include a Qucik Trade sub-system in order to improve its overall performance.

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=79684&highlight=*correlat*

     
    #25     Feb 11, 2012
  6. Other different approaches/instruments:

    " http://www.moneyshow.com/trading/article/42/VideoTransTr-24426/2-Proven-Ways-to-Hedge-with-Options/

    Buying index options or VIX options are cost-effective methods for insuring your portfolio against downside risk, says Larry McMillan, who shares tips for choosing the right option to buy.

    Professional traders always have a hedge on their trades to make sure that they limit their risk. Retail traders should be doing the same thing, but how do you actually do that?

    Our guest today is Larry McMillan to talk to us about that. So Larry, how do I do an overall portfolio protection plan?

    Well, the way I would suggest is what the pros call “macro protection.” In other words, you buy an index option to protect your whole portfolio rather than going in and buying individual puts on every stock that you own.

    That’s very time consuming and tedious really, so if your portfolio doesn’t exactly behave like the S&P 500 or the QQQ’s—it probably behaves more like one or the other of those two, but that’s the index I would select.

    Traditionally, let’s say, you would buy SPX puts; about 10% out of the money, and you would just hold them maybe three months out. You’re buying three months out, and you just hold them and then roll them over again.

    We did a study for Nuveen a couple years ago, and if you did that, you bought 10% out of the money, three-month SPX puts. Over time, it really only costs you about 2% of your net asset value every year, so it’s a fairly small cost of insurance, and of course, if something really bad happens—like in 2008—then SPX falls and while your portfolio may not exactly perform like SPX, you’re still going to make a lot of money on those puts and hedge your risk.

    In more modern thought nowadays, traders are leaning towards using VIX calls as protection because they’re even more dynamic.

    Typically, when the market goes down, the Volatility Index (VIX) goes up, and it goes up fast. In 2008, it went all the way to…like 90-something, but you want to be long calls on that because if the disaster happens, VIX will accelerate so quickly to the upside that you’ll actually make money…quite a bit of money.

    In fact, here’s an interesting statistic: VIX calls started trading in 2006, and if you had bought the one-month call, seven points out of the money or seven-and-a-half points out of the money, whatever, every month and just kept rolling it over, to this date you’d be ahead $3000 on that trade.

    There’s nothing else you can say that’s true about, but VIX is so volatile when the market falls, it explodes so fast that in 2008, in the flash crash in May 2010, and then a couple of other times, you made enough money on just those few times to pay for the cost of your protection all the way along.

    So the more modern theory is to buy VIX calls about seven points out of the money and just one month out in time and just keep rolling them over.

    They cost less than a dollar; $0.50 maybe, most months. This month’s a little more expensive because VIX has now gotten a little excited because the market’s been going down, so you might pay more.

    I think we just paid $0.90 the other day, but still, it’s not a huge expense, and you don’t have to hedge your entire portfolio.

    You really only hedge about 20% of the net asset value of your portfolio because when things happen, VIX is so volatile that you only need a 20% hedge and it will make up the difference. So that’s the modern way.
    "
     
    #26     Feb 11, 2012
  7. 9/26/2011 @ 9:13AM |817 views

    Using SPY Put Options For The Backdoor VIX Trade

    http://www.forbes.com/sites/greatsp...g-spy-put-options-for-the-backdoor-vix-trade/

    "
    SPX with Shares Sold Short

    Hedging with SPY Options: An alternative to hedging with VIX options is hedging with SPDR S&P 500 ETF (SPY) options. VIX call buying has fallen off a cliff lately, but SPY put-buying is at a very elevated level. While you’ll always have different investors using different vehicles to hedge with, this activity suggests that some VIX hedgers may be finding alternative methods to protect their portfolios.

    This could be the result of the VIX reaching such a high level recently. Some investors may like VIX options because they’re cheaper and require less capital — but that’s only true when the VIX is low, say around 20. Plus, you’ll likely get a truer hedge using index options. Now that the VIX is above 40, the capital required to hedge with VIX options is not so far removed from SPY options. With that playing field more or less leveled, money managers may be moving to SPY options to take advantage of the truer hedge.
    "
     
    #27     Feb 11, 2012
  8. Closed the remaining 1x @$0.09.
     
    #28     Feb 13, 2012
  9. New position:

    BTO 2 SPY1217O135 SPY Mar12 135 put at market Filled: 2.91 at 2/13/12 10:28 ET
     
    #29     Feb 13, 2012
  10. nitro

    nitro

    I like this trade, but it might have been more interesting if playing long gamma (like your position has), but add short vega. So add to this position, STO Dec 2012 OTM 1300 put for a credit of ~9.33, then hedge with SPY ETF to be delta neutral once a day.

    This way, if the market does nothing like it has, the long dated option will pay for your short dated option, and if we get a big move down, the long gamma will easily pay for the short vega.

    On the other hand, if you think the vola spike is going to be temporary, you might try strangle spreads.
     
    #30     Feb 13, 2012