I don’t fully understand your idea generation so it’s hard for me to say but I bet that if you understood the Greeks and backtested your Portfolio that you would have earned more being long stock.
Yeah, long the stock would earn more at lower levels of notional leverage. The detriment of this strategy is obviously the huge fat tail. You mentioned running into margin constraints and having to buy back positions partially to avoid liquidation. Imagine trading this strategy outside the goldilocks period of the past 1.5 years (massive rally in equities and huge amounts of vol bleeding out of the system). You'd be having to size back down way more often and more aggressively. Buying the puts back at worse prices. That is going to drag your returns. Also I think the holding period could be calibrated better to your strategy. I don't think balance sheet fundamentals will make a significant impact on individual equities pricing in such a short period of time. The relentless rally will though. There's probably an attachment to this method because it's earned for you and you feel like your personal insight is valuable with all the time you spend reading reports. But from an honest 3rd perspective it's still questionable if there is any alpha being generated. You also have the idea of puts as earning yield which is a common beginner's mindset to options but it isn't very accurate. If you look at the actual IV vs. RV figures of your trades and calculate the vol edge it's probably going to be way smaller than you think. IV bleeding out of the whole equities complex after March blow-ups and the long deltas are what is earning you money. Structuring as puts just concentrates your risk and gives you a smoother equity curve in between the periods when the fat tail finally hits.
What about a long calendar spread with puts instead? A long calendar spread with puts is created by buying one “longer-term” put and selling one “shorter-term” put with the same strike price.
What are your opinions of this approach? Can be rolled to the event driven side of things (with a defined catalyst)
it depends on your view and what the market is pricing in relation to that. (The implieds and stock prices)
I believe you mentioned you trade in illiquid names.My guess is you will get skewered in Bid Ask,and on a meltdown it won't really help you.. Are you heavily concentrated in the financials???
Insurers, leasing, holdings, royalties...sectors with a high and predictable cash flow. But yes, options are illiquid.
How about hedging with long OTM puts on IWM at an equal leverage to your long exposure? If you go far enough out of the money, say 5%, the cost wouldn't be too terribly high relative to your past returns, and it should mitigate the fat tail that everyone is worried about. I guess longing puts shouldn't hurt your buying power too much.
I am now nearly finished modelling hedging and will comment on this in the June monthly report in 4 days. Many here will not agree with my findings I am guessing...