Hi Guys, I need advice. I have a long-only portfolio and I'm feeling a little uneasy about the markets for the near term future. I'd like to use QQQQ puts as a hedge but I don't have much experience doing this. Assuming a 100k long-only portfolio (much of which is devoted to tech), how much should I spend in QQQQ puts to adequately hedge this? Also, what type/duration of puts should I use? Thanks in advance for your advice. Sincerely, Semper
Hi semper I have the same feeling as you - but I am cash only so I can enjoy christmas without the computer. To make a perfect hedge you need a piece of portfolio/risk management software, in lieu of this some good excel knowledge. I am sure you can find an excel sheet that can calculate the hedge for you. I can tell you the principles of doing this -Count your deltas -Beta adjust your deltas -normalize your deltas towards an index (QQQQ) -buy puts accordingly If we simplify this a bit and say your tech stocks correlate 100 to QQQQ this becomes more simple. Lets assume you have a volume of 3000 stocks in your portfolio, then you have to buy puts accordingly worth 3000 deltas (to see the delta of an option use for intstance IB or an option website) The delta of an option changes from 0-1 during the the lifetime of the option, so which of the options you choose to perform the hedge against is a matter of how much you want to pay for the hedge. Since you have a portfolio with stocks only this is not so differcult. Hope this helps, otherwise get back to me..
OK... had some time, so let me illustrate the principles.. First your unhedged portfolio as a screenshot..
Then the option listning, where I choose the ATM option March as the hedge instrument. As you can see in the previous screenshot you are long 31.07 QQQQ contracts. You can choose other series as the hedge, this can be cheaper Upps.. I put the errors in the call side.. this is wrong, on the left side are the puts.. Disregard the arrows.
And a shot with the portfolio after we sold 34 ATM QQQQ options. You have now a perfect hedge.. as of now.. However Delta changes every day- so the hedge needs to be monitored. You can see that your adjusted delta is now -.0,29 as oppose to 31 before the hedge - the hedge set you back USD 6.500
And last.. A screenshot with a graph with Delta as a function of changes in the spotprice.. This gives you an indication of how sensitive the hedge is to changes in the market.. Another type of hedge is called gammahedge, here you look at the quality of the delta to choose the correct option. But I think this is to adcanced for this thread. Basically you need a piece of software to monitor positions and hedge since they change all the time. You could also sell futures - as a main rule they have a delta of approx 1, hence you don´t need to convert them as I do (but you said an option hedge) The extreme solution would be to look at the composition of QQQQ (an index as I know) and break the basket down thus having basket adjusted Deltas instead.. I hope this gives you a better understanding of the hedge process. Best of luck Cheers, Peter
If you are that concerned, you are better off either (1) Going to cash and taking your profits, (2) Shorting the Qs, or (3) Shorting NQ if you have access to futures. Buying puts, you'll be paying a big price in decay if the market doesn't move your way, quickly and strongly.
The only true Hedge is CASH. 1 Be HONEST with yourself with your positions and the RISK 2 Hedging with QQQ's is a difficult road because of the COST and the TIMING. The ONLY hedge I now use is cutting back to a greater Cash Position. If I want to trade the QQQ, then I will TRADE THEM! Hedges for the most part are expensive and they cover your Trading Emotions!
I think the only true hedge in your mind is Cash. This is OK, and also what I have done this christmas, as I write in the first post. However the other methods has their merits for certain occasions. For instance a pension fund would not liquidate their total portfolio and go cash, simply because of a holiday or hunch about the future. This is too expensive. The threadstarter asked about the mechanics of an option hedge, and this I explained. The timedecay (theta) of option trading is always present, no matter whether it is speculation or hedge. This is what makes option trading unique, but the reward is so much greater than beeing stocks only. IMHO.. /Peter
The mechanics of an option hedge for a single trader always is better in theory. The reality for most individual traders is not profitable or practical when using options for hedging. As for large portfolios, they still have to IDENTIFY REAL RISK in their portfolios. CASH is still the best HEDGE for these situations. A typical portfolio will NOT have over 20% allocated for REAL MARKET RISK. Usually, you want to be SELLERS OF OPTIONS in large portfolios, beacuse you are a BANK. Individuals would be better off SELLING 1 Month ITM CREDIT SPREADS to manage Portfolio Risk.