Hedging An Appreciated Portfolio

Discussion in 'Options' started by spindr0, Dec 11, 2017.

  1. ironchef


    I usually do a no cost collar. If I am still bullish, I widen the collar. Yes, you pay for it with limiting your future gain. No free lunch here.
    #11     Dec 11, 2017
  2. spindr0


    Your replies indicate that you have a reading comprehension deficiency who doesn't play well with others. That suggests that you should just go off and play with yourself.
    #12     Dec 12, 2017
  3. spindr0


    Could you expand on the vols idea? If vols expand, rolling up shouldn't be terribly problematic because what you overpay on one side is overpaid to you on the other side, give or take.

    A ratio spread would do the trick in a crash but not for a drop down to the lower strike of a put ratio. That would add to the portfolio (assignment and not an objective here) or be a total loss of significant $$ if closing the spread or defending.

    Thanks for your suggestions.
    Last edited: Dec 12, 2017
    #13     Dec 12, 2017
  4. spindr0


    Yes, buying puts is expensive and is a 6-8% annual drag. Not a viable solution in most years. The collar avoids this since the short call funds the long put,

    Since some of this money is managed as well as in a variable annuity, selling the stock and buying calls isn't viable. Also, where possible, this creates a tax burden and that should be avoided for as long as possible.

    I'm not attached to my stocks. I bailed out of two VA's as well as most of my preferred income portfolio in December of 2007 and then rode the GFC down, net short. At this point, I'm looking for something that takes the crash scenario off the table.

    Thanks for your suggestions.
    #14     Dec 12, 2017
  5. spindr0



    As you know from our discussions, the index side of this is new to me. The VIX is currently above my pay grade. I'll look into it but it's not KISS to me.

    "You can mitigate this by buying a year's protecting in 90 day increments". As I indicated in my initial post, I'm looking at a long collar 3 months out. Are you suggesting that I ladder with four collars at 3, 6, 9 and 12 month intervals now?

    "Hedges purchased today won't offer the same protection when you're 3 months and 5% above your hedge value." Hedging value? Do you mean 5% above PV or 5% above the short call's strike? If the market moves up and challenges the short call strike, I'll roll it and the put up, taking the smaller loss on the short call and locking in another 5% of portfolio gain. If vols have spiked, I'll pay the piper on the vols delta.

    Selling calls on individual stocks to buy SPY / SPX puts can be done but not viable here. It's managed money so the individual stocks are not accessible. In theory, I could do it and liquidate small portions of the portfolio to cover losses but I would prefer a global solution like an index collar rather than dealing with multiple option positions on individual stocks.

    "But I should note, this is unsuitable for someone early in their investment career because giving up the massive gains on one stock, you never regain on the hedge." LOL. I'm on Medicare so keeping my accumulation is far more important to me than achieving future "massive gains". Finding a few extra years of cognitive ability would be a massive gain :->)

    Thanks for your suggestions.
    #15     Dec 12, 2017
  6. spindr0


    I was trying to KISS, myself so I did not indicate in my initial post that this is managed money as well as a variable annuity - so the individual equities are not accessible. Within each, there are multiple positions so yes, I could drill down on the managed money and sell naked calls on individual holdings. But if assignment occurred, it would result in cash settlement on the options and if so inclined, liquidate a portion of the portfolio.

    Similarly, a portion of the appreciated VA could be sold to offset option losses since I'm long since out of the surrender charge period but since it's LIFO, it's 100% taxable so that's problematic.

    Thanks for your suggestions.
    #16     Dec 12, 2017
  7. sle


    How about addressing it differently? What is the source of alpha and what do you perceive as the risk to the portfolio?

    Did you pick the right single stocks which outperformed the market? In that case I’d just short some index or, alternatively, put on a risk parity position (buy some bonds)

    Was it a broad market play? Find some high beta stocks you are bearish on and buy puts on those

    PS. Just read your last description, don’t think my suggestions above would be useful
    Last edited: Dec 12, 2017
    #17     Dec 12, 2017
  8. Sorry, I wasn't explaining very well a few beers deep last night.

    What I mean by paying to hold a collar (even a no cost collar) is that as price moves up on the underlying assets and away from your put strike. So you get less protection the better you do. The answer to this problem is bringing the expiry in closer. But that gives you problem because you're unlikely to catch the whole move down even in 3 months, and it's not a type of protection you can chase or pick up after the move starts. You can pay spreads to get out early, hold until expiry and exercise, or wait until volatility cools and the spreads narrow.

    As you say--no free lunch. Just trying to bounce ideas really. Some options I see:
    VIX ratios: Cheap coverage against a VIX move, but keeping sensitivity to it requires short term (30-60 DTE) options. And there's always the potential these settle just below your long strike for a maximum loss. Plus, if the move happens at the wrong time in the futures cycle, you won't get the full protection you're looking for.
    SPX collar LEAPs: Good, cost effective way to do it, but useless if bought, for example, at the beginning of this year. I would address that problem by doing it for 1/4 of my portfolio in 90 day increments. Still not great.
    SPX shorter term collar: Also good and cost effective, but only if you catch the whole move while your position is open. You're unlikely to do that because of how crashes develop, and you'll end up chasing the puts on the move down.
    SPX deep OTM puts: These will give good sensitivity to volatility, and if you go 30% OTM, you can pick them up for around 0.7% of portfolio value--but only for a 1-to-1 with the underlying. I'd probably double up on that one, once to get hit on the volatility, and once to provide a price floor.

    On all of the above, it's going to be tough to get out in the middle of The Big One. The LEAPs provide the best scenario here where you just take them on expiry. If the move on the VIX is sustained, you can hold this till expiry, but otherwise you'll be over a barrel trying to get out and take profit.

    Yeah, my posts were less for you than it was for the benefit of anyone else reading.

    As for shorting calls on stocks while buying puts on index, couldn't you get level 4 and do "naked" calls in one account backed by the stocks in the managed account?

    I think the answer here is a blend of all of the above. But you'd basically need to have the exit strategy in stone from jump. For example, I have seen great results on the VIX ratio spreads, but I've given a lot back trying to figure them out. I just rest orders to sell when they hit a certain threshold now, and would have been ragingly profitable had I started like that--but as of now, it's running a loss. I'm also not sure how large of the VIX ratios I'd be comfortable with.
    #18     Dec 12, 2017
  9. spindr0



    "Is the account taxable or qualified?"

    Qualified? As in LT tax treatment? One is taxable managed money (MM). The other is a variable annuity and the surrender charges have expired. Any portion can be liquidated.

    "Lot's of choices with options, but what is the nature of the portfolio?"

    The VA is an aggressive equity portfolio. The MM is a balanced portfolio and I would only be looking to hedge the equity exposure.

    "One concern will me margining the "technically" naked calls and does the account allow naked index options."

    Plenty of cash available and approval for all option positions, including naked indexes.

    "Play the erosion curve if you are going to sell some calls. Sell shorter dated against the longer dated puts."

    I am aware of that. Good suggestion. Something like short 2 month equity calls versus long 3 month index puts (or 3 vs 4) might make sense but I wouldn't want to go out much further b/t the two (like short 2 vs long 5) since buying more expensive puts (time not vols) would become worthless if the market kept marching higher and that would increase the drag on performance.

    "Collar some, but recognize no investor really wants to sell those calls - they just want to finance the puts so get creative. Sit down and do a forecast for the market overall and your individual names. Why do this - it's good discipline. For example, if your forecast for your portfolio is up/down 10% in the next year some would say that is an expected zero return and my hedging would be very aggressive. Let's say it's up 20% versus an expected risk of 10% - well I know have a sense of what strike price to trade."

    Not only is this above my pay grade but I have no clue what the market will do. Miss Cleo was better at predicting the market than I am and given that she's dead, all I have is ET to turn to (g). I'm just looking to play bookie, eg. just work the numbers. At this point, a 5% three month collar (or diagonal collar) seems reasonable and I could live with 5% portfolio appreciation and give some back if the short calls go ITM. I doubt that we will have many years of 20% per annum and if wrong, I can live with nabbing 20% and ceding the upside above 20%. And yes, that's an annual projection. I'd be living in the 5% per quarter domain.

    "Use equity calls versus index puts - the portfolio would then adjust if the calls were exercised and equity calls would generate larger premium the comparable index options. Again this blows the cash settled issue. Get creative."

    This is the gist of what Beerntrading has been suggesting to me. I'm going to have to think this out a bit to figure out if viable since I'd be hedging outside the MM and VA and the actual equity positions would not be assigned - it would all be cash settled. What does "this blows the cash settled issue" mean?

    "Watch out for mark to market issues if you do cash-settled index options now and carry through to 2018."

    Not familiar with this. Can you elaborate? Since I do not have Professional Trader status, if I utilized a March 2018 collar 5% OTM, how would MTM affect me?

    Thanks for your suggestions. Much to think about.
    #19     Dec 12, 2017
  10. spindr0


    I sorta feel that being outside the portfolio (managed money and a variable annuity), it might be too cute by a half to attempt to sell naked calls on the higher beta equities without access to them. That would make everything cash settled (all options) with the only recourse to liquidate whatever portion of the MM or VA necessary if the short calls took it on the chin. It wouldn't be the end of the world since there's be some degree of portfolio appreciation but it might become an issue of stock specific news having an unintended impact (that equity zooms but the portfolio does not). Plus, it's not that KISS. But keep those cards and suggestions coming. Thx.
    #20     Dec 12, 2017