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Portfolio123 » List all forums » Forum: Simulations and Portfolios » Thread: Adjusting hedging index puts, trailing stops - advice needed |
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Total posts in this thread: 7 |
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dwrowley
Advanced Member
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I had some good success this week by fortuitously buying a put on IWM on Monday which is now up 156% for the week. I bought an at-the-money put when IWM was around $82.0 and the May '07 option was at $2.18 - and it is now at $5.40. So although my stock value is down 7.5% for the week, my net loss is around 3% (I wasn't fully hedged). So should I now reset the put down to a lower strike price (say $77) or keep my existing put in place? My delta on the put now is -75 and of course a new atm put will be at -50. What do you do with your hedging puts? How do you adjust them? Also, I was never fond of trailing stops, since in a big market correction I expected that many of my stops would be fired, causing my stocks to be sold at bad market prices in the freefall - however, now that the portfolio is hedged with a put I'm reconsidering this since my downside risk is now protected. I'm thinking of trailing stops at -20% - thoughts? (I got dinged by AVCA falling 30% this week) Thanks - this is a great community for these types of discussions, David ---------------------------------------- [Edit 1 times, last edit by dwrowley at Mar 2, 2007 8:46:04 PM] |
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jtbaccarat
Advanced Member
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1. good call; insurance is never unwise, especially after a prolonged run up and prolonged decline in option volatility 2. why do you need to get out of the put and incur transaction costs (spread on the sale and the buy, which could be fairly significant, plus commissions) when your position is now ITM and is thus has a higher delta (more correlated hedge)? The option is doing exactly what you wanted it to do. One concern is that you have not hedged your entire portfolio. 3. if you are asking about option strategies now that your put is ITM, that is a different question, but if your intent is insurance, then leave the insurance alone 4. strategies (if that's what you want, but this means speculation and market prognostication, not insurance): sell a put that expires in March if you think we may have a little rally, then buy it back on a rally (this is a short term trade; don't sell the new put until you see a really ugly tape) then use the profit to buy a put to get your hedge up to a higher amount since you mention you are not fully hedged, and are down 3%. Your best bet in my opinion is to hold on to the current put as I suspect you have made money in the portfolio in the prior months, so pay the insurance and let it do its job. 5. think about tax, too: your put buys you insurance, and you do not have to book your capital gains now, if you do not want to. ---------------------------------------- [Edit 1 times, last edit by jtbaccarat at Mar 2, 2007 6:51:13 PM] |
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dwrowley
Advanced Member
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I'm treating this as insurance, rather than a speculative investment so I'm fine staying with the put as-is. So should I just stick with my original plan of selling the put 30-35 days before expiry, and then buy another at-the-money put at the current strike price? Or is there some market condition that would make it useful to sell the put prior to then? |
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dozu
Member
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Has anyone considered LEAP type of puts (e.g. Jan 08) to reduce transaction cost? I hedge with futs so haven't looked into option hedges too much. |
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dwrowley
Advanced Member
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It seems like the going wisdom is that the time value of LEAPS is too expensive for it to be useful for hedging. |
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jtbaccarat
Advanced Member
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I would calculate the cost of the LEAP vs the near term options (and remember to consider the buying and selling transaction each time when you go to the next expiry). The LEAPs may be cheaper; calculate it and find out. Options lose their time value on a steep slope starting somewhere around 60 to 45 days out and accelerate less than 30. I would consider the longer options and holding them until 60 days and then roll over: buying and selling the shorter term options, especially on ones with wide spreads will add up the costs. If one were bearish, they'd wait for a rally (a big up move at the open, would be a good example) and buy the puts for the month you want to move into, and keep the original puts until another big down day and then unload the original puts. |
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olikea
Advanced Member
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This is definately an interesting thread. To me options always seem far more complicated than they first seem. In theory, to remain fully hedged, you have to continually trade. If the index moves up, particularly if your options are at-the-money (ATM) , then the delta is reduced so you have to buy more to remain hedged. If they index then falls you must sell them otherwise your net delta becomes negative, meaning you are making a bet on a falling market. The problem is such a strategy is likely to be very expensive in the long run and cost you a large part of your returns. I don't think its sensible to attempt complete volatility smoothing, but it does seem prudent to insure against disaster, particularly if the insurance is cheap (which it ias at the moment). My own strategy is just to buy ATM puts that are a few months out and hold to expiry. Its a pity there isn't a "options123.com" where such things could be tested. I have never been a fan of stop losses or trailing stop losses. It is only sensible to have them if you believe the market is going to trend down after a significant fall. In fact, as Stitts discovered with his "stitts challenge", it looks like the market (or individual shares) "snap back" a little after pullback. If everyone is using stop losses, then shares do get to the point of being oversold. Another problem is once the stops have been hit, what is your re-entry point? "When the market calms down" or "when the market is starting up", are discretionary judgements prone to all sorts of emotional biases. I know a lot of people don't like the rapid time decay of options near expiry, but on the other hand, because options near expiry have much cheaper time value anyway, they consume less capital, and therefore the payoff is a lot higher. I don't think its quite the clear cut case it first appears. Oh well, interesting thread! |
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