Hedge Losing Stock Position

Hi Guys,

I got dragged into a daily range accrual trade back in Jan 11. The stock is Lloyds TSB and it is down around 50%. I'm still concerned about additional downside and I'm looking to hedge it using my IB account.

Any recommendations as to a feasible was to hedge against additional 25-50% drop over the next 4 months.

Thanks in advance,

Rob

 

1)buy puts
2)short another similar company
3)sell the position

 

Write covered calls.

 

selling covered calls is no hedge against the 50% drop the original poster expects

 

Why would you stay with the trade if you expect the security you're long is going down?

 

He didn't say he was expecting it to go down. He said he was worried it would go down.

You go long and determine you can stand a 25% hit, then you take the 25% hit and now you worry any more and you can't hang on.

Go back in time to when you went long and buy protection which kicks in after a 25% loss.

 

Other than getting out, buying puts is the only way to hedge against a 25-50% drop.

If willing to limit the upside, you could collar the position to reduce the cost of the puts but that's not too good of an idea if you're already down 50%

 

It doesn't sound like a simple stock, or option but one of those exotic structured instruments that sounds reasonable but always ends up in favor of the seller/originator. I recall Schwab trying to sell me some kind of "structured note" or something back in early 2008. It paid a good yield unless the S&P went down 15% (I think all it had to do was touch). The argument was "Do you really think that is possible in the next 12 months?". I thought it was possible so I declined, and it did

As far as what the OP can do, I think we need more details.

 

Thanks for your replies.

To explain the trade. DRAC is a trade where a basket of stocks are used for 6 month term with a projected return of 13% in this case. If a stock stays above 85% strike price (spot price - 15%) you generate monthly income. If any stock falls below the strike price at expiration you get assigned.

In regards options to hedge, puts are first logical choice. Due to high volatility they are quite expensive. Covered calls are not an option at this stage.

I've also considered shorting French/German banks as they should fall faster than UK based banks if we face another liquidity crunch. Keep in mind that Lloyds is still owned mostly by the UK gov't (65%) so there should be some cushion there. Or is it just an empty hope.

Again, I appreciate all responses.

 

A couple of questions:
1) What do you expect the underlying to do in the future?
2) Is this a long or short term position?

If it's a long term position that you want to maintain but are worried about additional downside, why not sell 50% of your position and then take advantage of the high volatility to sell short term cash secured puts? This way you at least average down your existing position (note, I'm not advocating doubling down here, just reallocating your current position). In the event things settle down, you can keep selling them until you are assigned and cut away at some of your losses. If the market drops, you're less worse off than if you did nothing, since you pocketed the premium.

Also, you said covered calls are not an option. Why is that?