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Hedging An Appreciated Portfolio

  1. OK, it's my turn to step up to the mike and face the ET audience. No tomatoes, eh?

    I think that I have a fairly decent grasp of utilizing equity options on the retail level but I no experience whatsoever for hedging an appreciated equity portfolio with index options. So I'm looking for some suggestions - and nothing complicated and/or exotic like using the VIX. Maybe a little KISS for me???

    My starting thought for consideration is using a 10% wide SPX collar (a short call 5% above and long put 5% below) for a modest debit. I'd determine my equity exposure and do the appropriate number of collars. If the collar got into trouble to the upside (the SPY was up 5.4% in the first quarter and 6.9% this quarter), I'd roll the entire collar up 5%, maintaining the same 5x5 pct on either side. Technically, I could sell a small portion of the portfolio to offset the upside collar loss for rolling but since I have the cash, not necessary unless the market melts up, which I doubt will happen without my having the time to adjust.

    I got out of the way in 2000 and 2008 but I'd like something in place that avoids a day (or longer) like Black Monday in 1987 when I didn't know enough about getting out of the way (the 2 month 18% drop before the crash). What a nasty day! I want to stay in the game but I want to lock in years of gains. I don't have a problem with selling off a portion at an appreciated price if things get out of control but I really object to giving a large chunk back. Yep, a bit retentive here.

    Any ideas how this approach (sort of a pseudo synthetic vertical) can be improved upon or perhaps some other ideas for some semblance of profit and protection? Or perhaps there was a previous convo about this on ET in the past (link?)? Constructive suggestions appreciated. TIA.
  2. you sound like sum kid that just got out of finance school
  3. very easy to solve ur little problem but i dont like finance kids
  4. I think at these levels of call vol, trading a collar is not the best idea. Maybe something ratio-like where you give up a bit on a small decline but get fully protected in a big selloff?
  5. You can buy puts, or you can sell your stock and buy calls. Either way, your protection is temporary and must be renewed, and it's expensive, even in these times of low volatility. Instead, may I suggest using the hurricane warning system here: http://retirementoptimizer.com/

    Try not to be attached to hanging onto your stocks. If the shit hits the fan and you have to get out, they will still be there when you're ready to rejoin the party.
  6. Well (and for the benefit of others), if you're holding this position, you're probably stuck in it for the short term when liquidity evaporates when it hits the fan. Which means you need longer term options. Both points are very much in line with the intent to hedge a portfolio.

    So, to state the obvious (as inferred from the title), hedges purchased today won't offer the same protection when you're 3 months and 5% above your hedge value. But shorter term doesn't cut it because crashes in the market usually happen in slow motion, and an expiry is going to force your hand before it's complete. You can mitigate this by buying a year's protecting in 90 day increments.

    The VIX offers some good protection in a price agnostic sense. Ratio spreads are the answer here, but they're pricey if it settles above the low strike and below the top. But you can (for example) short the 8 and long the 9 while both are ITM and take a credit. And it's not a problem that it expires before the crash ends because the vix hits early.

    ...sorry, hit post by mistake...more too come.
  7. You can play it with volatility too, using a low delta put that's going to respond to volatility similarly whether it's 20% or 25% OTM. As long as you can swing the capital to short the SPY when spreads spread, this gets you around the liquidity crisis.

    And the final one will come as no surprise to you, what about selling calls on individual stocks to buy the SPY / SPX puts? Keep positions level in value in dollars (I.e. Sell the shares to pay for losses on the calls). Depending on your portfolio, you can probably pick up SPX puts for a year by giving up the gains on 30%-ish of your portfolio (more if you're loaded up worth dividend dinosaurs). You'll pick up the commission differences and then some on increased volatility in 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.
  8. You said KISS, if so why not do a no cost collar on the equity itself and why hedge with indices? Or you could sell the equity and buy an equal number of OTM calls?
  9. Implicit in the title is more affordable coverage against appreciating assets (i.e puts that don't lose sensitivity to price changes). Collars are obvious, but you pay over time to hold these...either in lost gains or multiple premiums.
  10. Is the account taxable or qualified?

    Taxable - I would pair of some losses with gains.

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

    If it correlates well to an index consider - as others have mentioned - collars or ratio spreads in cash-settled options so the balance of the portfolio remains intact. One concern will me margining the "technically" naked calls and does the account allow naked index options.

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

    No one hedge idea will be ideal. Consider doing tax matched selling to harvest the loses. That will define the $$ of any offsetting sales.

    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.

    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.

    Watch out for mark to market issues if you do cash-settled index options now and carry through to 2018.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. Beer,

    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.
  16. 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.
  17. 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
  18. 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.
  19. ajacobson,

    "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.

  20. 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.
  21. If the SPX approached the short call strike, one could roll the collar up. How much that cost would depend on how close it was to expiration. I think that it would be minor, compared to locking in another 5% of portfolio gain. That's the trade off. The ET option trader's wet dream is that after doing so, the market collapses and in additon to the ~5% put protection from the collar, that previous, near worthless set of puts also comes into play and the downside becomes a winner since you have double the protection, at least below the lower put strike. Yeh, unlikely but a nice fantasy that occasionally come true when near worthless long options come back to life.

    I have Level 4 so naked calls isn't a problem. I just wonder if that approach introduces the issue of stock specific news creating an additional problem, namely one stock zooms up, say due to a very good earnings announcement, yet the portfolio goes up minimally. Now I have a call loss without the associated 5% portfolio appreciation (my initial tentative collar distance premise).

    If I utilied an index collar. I think the management would be reasonably similar to what I do when defending or booking gains with a single equity and attached options (or a vertical). To the downside, get outta Dodge or roll the long puts down and sell more call premium if defending. To the upside, roll the entire collar up. I think increased vols would not be much of an issue to the upside.

    When you figure it out, post a Cliff Notes version here for me.
  22. OK the devil is in the details and with more details the answer changes.

    I would still match of some profits and losses in taxable accounts.

    I assume the annuity has a minimum guaranteed return - if so than the annuity has some hedging already going on in it. I also assume it is indexed to some broad benchmark and some return parameters. Say X% of the bench-marked index or X% of the average monthly returns. Many annuities are crafted with a combination of some interest return instrument and then some structured options to create the upside. The ones sold with average monthly returns -for what it's worth - are not as peachy as they sound. Your return in an up year may be less than the annual return. Knowing more about the annuity will help you decide.

    You mention some of the account is managed by a MM. Do you have any sense as to MM's ability to hedge? You don't want to double hedge and if the MM has the ability to change the asset mix and take some/all of the account to cash - hedging cash is unnecessary or certainly not a collar. The risk of cash is an upside spike.

    Hedging needs a sense as to what concerns you - not clairvoyance and no one brings clairvoyance to the party. The key to getting rich has a component of "not getting poor" first.

    What keeps you up nights? A flat year - a 10% correction - a brief flash crash - a protracted bear market - just to name a few, but what keeps you up nights?

    What would you do with the payoff from a successful hedge? Just pocket it - bottom fish - buy some t bills?

    Hedging is creating a form of insurance and some people want to be protected against a scratch in the parking lot - low deductible and expensive - or a catastrophic accident - high deductible,but much cheaper.

    It sounds less and less like your a collar candidate and more like some ratio put spread. It would magnify small loss - not impact your upside - and create catastrophe insurance.

    As I mentioned in my initial post it might be some put spreads and some collars.

    How do feel about the upside. If we melt up in a week and you don't get the opportunity to roll are you going to hate yourself.

    You don't need to post your answers - just think about your choices.
  23. Though I don't need to post my answers, I will because you have been providing the most thought provoking replies.

    In hindsight, it would have been easier for everyone to follow had I provided more details - I was trying to keep it simple. I started with VA's 15 years ago and have 1035-ed a few times as well as having gone to cash with them in late 2007 (one VA transitioned to fixed via their market algorithm and I did the same with the other two). I fully understand and accept the rider fee drawbacks as a trade off for income for life. In 2009 I went back into one of them (market exposure) and I'm now drawing on the other two.

    The one in question has a guaranteed 10% growth a year (simple) for 10 years on the deferred side with a guarantee of 5% a year withdrawal feature for life as well as 100% of the balance of PV after withdrawals if I die before 20 years. The sub account (portfolio side) has no indexing or guarantees. If the market is up, I'm up though I lag it due to the fees. Its value is almost a double now and is mine at any time, subject to taxation of gain. It has kept up with the deferred side and I'm in year nine. The 10 year deferred side has a year plus to run. Due to trading gains made in 2008-2009, my need for this particular income is no longer the issue so I'm more concerned with protecting current liquidation value, hence this hedging topic.

    If I low/no cost hedge this with a 5% collar, it may allow me to avoid no more than a 5% loss (an approximate correlation assumption) and less if the puts aren't driven to parity after an ITM drop. If it challenges the upside, I can roll the collar up, locking in another 5% of gain while booking the loss on the ITM amount. If so inclined, I can liquidate a small portion of the VA to offset short call losses if they're significant.

    Does this game plan make sense, give or take?
  24. Rolling a short call up when challenged generally did not work too well for me, costed too much. Even if I rolled up and out to buy time and collect theta, they generally did not work too well either.
  25. A collar is appropriate but you will lose money on the collar in a rally. So you have to be okay with funding those liquid losses while your illiquid annuity earns.
  26. I'm not a fan of rolling ITM covered calls up, booking a loss and carrying a paper gain. The market has a perverse way of making you pay for this. So the time to take action when defending is when the underlying approaches the short strike.

    If you roll a call up, giving you further upside appreciation on the underlying, it will work out. Surely, not as well if you have not sold covered calls but it will make money because you get some add'l premium as well as well as add'l underlying gain.

    This collar idea isn't exactly the same since there's no add'l premium received from rolling it up (there will be a debit) but the underlying appreciation will be there.
  27. That's true but I covered that scenario up above. If I sell a 20 delta call 5% OTM, I might lose approximately 30% of the gain if the rally occurs very soon. It could be more if vols expand but that's not likely to be much on a rally. Vols expanding would is more apt to occur in a correction and that helps the long put of the collar as long as it's not a crash, driving the put toward parity.

    The funky part of this will be breaking the equity exposure out, determining the beta of that and basing the hedge on that. Or perhaps I KISS and just compare annual gain of each (entire annuity versus market) and let that be my beta - just thinking out loud...
  28. Don't worry about vols. You are short delta and will lose money proportionally when the market rallies. How you respond to that is a another decision you will have to make, but by then you will have lost money on the collar and made it on the annuity.
  29. I'm not worried about the vols at all. I doubt that it will affect me to the upside and it can only help on the downside since the long put is throwaway money funded by OPM.

    I would have no problem with this collared VA rising 5% quickly and having to shell out 30% of the gain in return for buying back the short call, adding a new collar 5% higher and locking in 70% underlying appreciation. Not likely to happen much but I'd take it in a day, or preferably in two plus months with the pay off being 80-90%.

    I'm not lost in pie in the sky numbers (gaining 5% per quarter). In late 2007 I set a mental stop around 10% and when it hit, I moved to cash. This time, a 5%/5% collar seems like a better approach.

    Thinking this out a bit more, I need to drop 5 years or more of S&P data as well as the VA's value into a spreadsheet and see where the VA was every time there was a 5% S&P move in a quarter. If the numbers don't look great, I may have to shorten the duration of the collar, perhaps to two months. I can spitball option values quickly with my software. The end result won't be perfect but something in the ball park will suffice.

    Thanks for your suggestions.
  30. From what you have said throughout this thread, I get the sense that you want to protect the downside and are willing to sacrifice the upside. Then the collar is fine. It's a common structure for people to hedge illiquid positions (like Marc Cuban's famous Broadcast.com/Yahoo! hedge).
  31. Yep, you got it. I want to put a floor under the gains (nearly a double at this point) but have the opportunity to participate to the upside, even if it's not at 100% (possible collar loss). With a little luck, the upside participation will continue since I doubt that we'll have many years of 20% gain like this one (a guess, not a prediction).
  32. From the way collars price you will give up more upside gains than you will get in downside protection.
  33. Yes, that is a problem since a no cost collar might have to be -9% / +5% or if balanced (-5% / +5%), for a decent debit cost.

    I would assume that all broad based ETFs follow this pattern. Yes?
    No free lunches anywhere? :rolleyes:
  34. maybe the kospi or Nikkei... but that will create all sorts of basis risk for you.
  35. Nah, that's too sophisticated for me.
    I prefer blunt force trauma.
  36. I wouldn't do that either. I would do the collar if you can support the liquidity mismatch or I would just liquidate the annuities if the fees and tax implications aren't too bad.
  37. The tax implications are problematic since it's 6 figures of gain and any withdrawals are LIFO.

    Probably TMI but there are many 1035 swap choices out there. So far, I've found:

    A 5 year fixed pays 2.65%.

    A 10% "buffered" variable provides a annual 10% cap on market profits with 10% no risk below but you bear all the risk after a 10% loss.

    A 7 year indexed annuity provides up to 5.5% per year with 100% protection of principal.

    AFAIC, these all suck.

    At this point, supporting the mismatch makes the most sense. But I'm still looking for something or someone clever. That someone would have to be someone out there who understands both options and annuities and it's hard enough finding someone who really gets one.

    Thanks for your ongoing suggestions.
  38. I have some more questions for roughing out what I'm considering.

    With the SPY at $266.50, a 3 month no cost collar would be a Mar 2018 245p/280c.. That represents an 8% max loss and 5% upside potential.

    An equidistant 253p/280c collar would cost about $1.40 out of pocket which is 28% of maximum of the SPY's upside gain.

    Assuming direct correlation, to hedge each $100,000 of the managed money, would the number of collars needed be $100,000 / $26,650 ?

    Suppose the portfolio is 75% equity and 25%. That means that I need 3/4 the number of collars of the above calculation. And again, assuming direct correlation, to the upside the portfolio will earn 3.75% when the SPY rises 5% so perhaps I need a different collar width. And to complicate things, if I'm doing an equidistant collar (5%) that costs $1.40 out of pocket and I'm only netting 75% of the SPY's gain, not looking so good at this point.

    I'm just thinking out loud and would appreciate any additional feedback and suggestions.
  39. OK, the ongoing saga of hedging non correlated assets. I apologize for the length but I'm looking for HELPPPP !!! :->)

    In 2009, I took some of my trading profits and bought a variable annuity for the purpose of guaranteed income for life once I reached 65. It has nearly doubled in value in 9 years. I have two others VAs which I am drawing income from and I have decided that I do not need this 3rd VA for that purpose. My objective going forward is to keep some upside exposure to the market but incorporate some sort of floor of protection on the appreciation.

    Earlier in this chain I toyed with the idea of collaring this VA with SPY options in my IB account. ATM long puts are too much of a drag on performance. Nix that. I mentioned a -5% / +5% collar but that would be modestly out of pocket since puts cost more than calls - not a big problem. A -8% / +5% could be done for no cost. The correlation is problematic because the VA is a 90/10 equity/fixed. It's doable but there might be a bit of variance and how much that is, is unknown. So I'm exploring other possibilities and writing this out for two reasons. One, it focuses me and helps me to flesh out some pitfalls and second, hopefully some feedback can keep me moving forward.

    The are some 'buffered' annuities (SIO-s). If I accept a 10% annual cap on profit (several indexes can be used), I can be protected from the first 10% of drop. I initially dismissed this idea because I would bear all of the risk after a 10% drop. But after further thought, I realized that put protection 10% OTM is fairly cheap. Currently, the annualized SPY cost for nearer months (Feb, Mar) is about 1.35% and going out 1 full year would be about 2.5%. So while I bear all of the risk in the current VA, shifting to this SIO would provide a 6:1 to a 3:1 R/R, depending on the month utilized.

    For example, if I put 100k in, the intial buffer would be 90k/110k. At the end of one year:

    - if over 110k, I'm worth 110k and my second year buffer steps up to 99k/121k.

    - if b/t 100k and 110k, I'm worth whatever that value is.

    - if b/t 90k and 100k, I'm worth 100k.

    - if less than 90k, I'm worth 100k minus anything below 90k (if value dropped to 82k, the first 10k of loss is protected and SIO is worth 92k)

    I don't know where adviser fees fit in. If they come out of the 10%, it's a problem. If it's 10% after fees, not a problem.

    Hedging: If I buy 10% OTM SPY puts, I'm fully protected, less the put cost. With the SPY at 270, four Mar $243 puts would hedge 108k. At a cost of 70 cts per put, that's about 1.35% a year. So best case scenario, I make 8.65% a year and worst case is -1.35% per year.

    If the SPY rose, my 10% OTM strike would rise at the end of each quarter. For example, with a 5k SIO gain by Mar expiry, my June 10% OTM puts would be at the 95k level. If the SPY crashed, I'd make up to 5k more on those puts (105k drops to 90k, my puts make 5k and I get 10k from the SIO so I'm whole).

    Sounds too good to be true and in writing this, I realize that it is. If the market drops by March, re-upping the hedge at the 90k level is going to cost me more premium than the first hedge since the puts will be less OTM. If instead, I hedge 10% away from the SPY (say at 85k with market value at 95k), I now have another 5k of loss potential on top of the put cost.

    Given that, it means that I have to spring for a 1 year put LEAP at the outset so that my protection is locked in at 90k until the buffer resets at the one year and then buy another 1 year put based on 10% below the 1 year SIO value. This currently costs 2.5% and drops the R/R to 3:1.

    Another possible speed bump is that a bump up in implied volatility will increase the hedging cost and drop the R/R ratio. I should also consider a lower strike, trading hedge cost for less risk protection (say at the 85k level).

    Bear in mind that this idea is geared toward converting 100% market at risk money into something safer but potentially better than a MM or CD return. If the sh*t hits the fan again, as it did in 2008, I'll go back into the volatility trenches and trade merrily. That's a different game. This money is safe money.

    So, does anyone have any suggestions as to possible pitfalls or other kinks I'm not seeing with the hedging aspect? TIA
  40. I'd like to thank those who contributed constructive replies to this chain. I'm a happy clam right now because two weeks ago I cashed out of the aforementioned variable annuity which nearly doubled in the past 9 years. I got the top.

    I took 1/2 the proceeds and put it into a 10% "buffered" variable annuity which provides a 10% annual cap on profit with protection against the first 10% of loss. I also bought some puts 10% OTM to extend the downside protection. The gains went into the sheltered MM.

    As the volatility levels off and the B/A of the options narrows back to a sane width, I'm going to roll the long OTM puts down (they're not that far from being ATM), pulling out gains and lowering my cost basis. If necessary, I'll take the haircut but I'm going to try to avoid it. It's not a winning strategy if the market continues to collapse (net delta is against me) but it will soften the blow and I'm betting that I can book a chunk before my 10% buffer is exhausted. And if there's ever a rebound, I'm ahead sooner. So again, thanks.
  41. Yeah, you got one heck of a test today!
  42. His made out like a bandit with all his long OTM puts. Good job spindr0!
  43. I have been utilizing options (retail trader) for over 30 years. In 2008-2009 I traded a lot of correlated financial stocks successfully as pairs and in size. I have also dabbled with using the options of higher beta stocks to hedge correlated lower priced issues in the same sector. In all of these travels, as I mentioned in the first post of this chain, I had no experience whatsoever for hedging an appreciated equity portfolio with index options.

    Being much older now, income and safety has been becoming more and more important than risk on growth. I'm gradually leaving the hare behind and becoming more of a tortoise. This is what attracted me to these newer "buffered" annuities that offer an annual cap along with 10-20-30 pct of downside protection. And I'd bet that none of this interests anyone here :->)

    What i did fail to do was to extend my thanks to beerntrading for all of his patient responses to my many PMs about this topic. Most stunning of all was the revelation of how you can duplicate some of these "buffered" annuities with a combination of options and the underlying index.

    After crunching lots of numbers, I realized that if IV is low, this synthetic offers mildly better protection as well as a better return than the index annuity. A second bonus is that with the synthetic, you don't have to commit to multiple years in a contract and you can terminate it anytime you want. Or if you want to continue the process, add the new legs when the one year LEAPs expire. While it's not a deception, I find it ironic that the insurance industry packaged a multi legged combo position and dressed it up to make it look like a much prettier toy (g). So if/when things settle down, I'm going to add some more of this, albeit synthetically, in the SPY (6 months out). I'll update the results if/when an expiration rolls around. Signing off...
  44. I booked the gains in my long IWM puts that were hedging the aforementioned annuity. Had to move on to the SPY because the IWM B/A spreads were Holland Tunnel wide and that prohibited rolling. Too much of a haircut.

    Haven't added any synthetic positions to mimic the annuity - IV still too high. I'm just working on improving the hedge on the original position.

    With this AM's drop, I converted half of the long SPY puts into a no cost 10 pt wide vertical. Cost of Sep SPY 245/235 bearish put spreads for a debit of 44 cents. LOL. That's the actual cost, not the spread price. With the afternoon bounce, I bought a few more long puts. As long as the market is volatile (and cooperative), I'm going to keep adding no cost hedges. Eventually, I could end up with enough of them so that I'd be wishing for a total market collapse :->)