What is most effective way for a trader/investor to continually hedge against a large drop in the S&P 500 without giving up a large part of profits to pay for this hedge? The hedge would have to provide protection against a blow up. The kind of protection that a stop loss will not provide in the event of a large unexpected crash.
There is just no low cost way of doing this and still be exposed to a sharp drop. And by definition, these events are unexpected, so they can happen at any time for an event we can foresee. Trading uncorrelated assets should help but that is not a guarantee, as we don't know what that event will affect.
I don't know what "low cost" means, but vol is pretty cheap right now. You can buy a December ATM put for about 100 points or 4%. It means you would lock in about 3% (5% ytd appreciation and 2% dividends minus 4% premium cost) this year and still maintain all the upside remaining in the year.
Perhaps place a conditional order, if SPXU has volume greater than 7 M, go long. https://www.barchart.com/etfs-funds...=0&sym=SPXU&grid=1&height=500&studyheight=100
IMO, giving up 4% per year, year over year, sounds like a lot to me. In this type of market, many large family offices and pension funds would be very happy with a net of 6%. Not sure how you get there paying for insurance all the time.
I'm talking tactically today. In general the cost of that insurance is higher. And i agree you can't earn 6percent paying for insurance all the time.
Keep in mind the curbs/circuit breakers prevent the overnight/weekend S&P500 from declining more than 5% from the last close. Unlike the old days, you don't have to worry about waking up to a 20%+ gap down. A stop loss should keep you out of harms way during the regular trading session which has 3 curb/circuit breaker levels at 7%/13%/20%. It is a good idea to exit before the first level is hit to avoid panic selling - IMHO. http://www.cmegroup.com/trading/equity-index/faq-sp-500-price-limits.html
IF you think the market has a better chance of 1) sitting here, 2) go up slowly or 3) drop hard and most important, NOT 4) drip down slowly, then your best bet, with vols low, would be put backspread- continuously roll it to another expiration cycle IF the market does what you think it won't do--4) leaks slowly which exposes the b'spread to a risk hole ie your short put while your 2 long puts wont be of much help. AGAIN your prediction of a certain probability dist HAS to come true in order for your hedge to be not expensive. John Bender from Market Wizards had this interview in the book "Market Wizards". Alternatively, you could wait until spy reaches a certain chart point but it might be too late to put on that spread by then.BTW, depending on your strike placement and skew conditions you might make little $$ in patterns 1 and 2.