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Friday, December 11, 2015

Hedging downside risk

A few plays this morning:
These were the Long Puts with which I started trading 2016 options. For more details read Long March 2016 SPY Puts

0.22 gains per contract, in 6 contracts represents a small $132 gain or +0.13% for the $100,000 model portfolio. This closing move was not about taking gains and removing protection. It was about buying more effective protection closer in time, which will work better in the event of a catastrophe. This led me to the second play of the morning:

Purchase of 7 of these contracts. So, to sum up, I have not done anything other than bringing my original protection closer in time.

Trade Update
This position was closed the same day during afternoon hours for 1.05. Net gain of 0.37 per contract. $259 in 7 contracts.



Finally, because a new RUT Credit Put spread was entered two days ago, it was wise to also hedge it. So, third play of the day:

20 Contracts for the model portfolio.

Trade Update
This position was closed the same day during afternoon hours for 0.42. Net gain of 0.17 per contract. $340 in 20 contracts.


After closing both the IWM hedge and the SPY hedge, I deployed them again, using January options in both cases:



We have strategically deployed portfolio insurance in January while we have been paid to do so, with total gains of $731 in the process. We started from March positions where, little by little, we scalped Vega as we brought our hedges closer and closer in time. With these positions in place, the Model Portfolio is fairly well hedged against downside risk. No need to add any more protection prior to the Fed meeting next week. I will go through the meeting with the current SPY and IWM hedges and in all likelihood, if the markets rally, I will keep them as sunken cost all the way to January expiration.


Current Positions:
January SPX 1865/1875/2200/2210 unbalanced Iron Condor
$2,300 credit. 5 weeks to expiration. SPX currently at 2,012

January RUT 1015/1025 Credit Put Spread
$1,200 credit. 5 weeks to expiration. RUT currently at 1,123.

January IWM 95 Long  Puts
20 contracts for downside protection against the Apocalypse. $560 debit invested.
Trade Update
Closed IWM Puts on December 16, after the Fed Meeting for 0.09. Entry was 0.28, so it's a 0.19 loss or $380 in 20 contracts. No more need to keep this hedge into Christmas/New Year.


January SPY 169 Long  Puts
9 contracts for downside protection against Nuclear Armageddon. $486 debit invested.
Trade Update
Closed SPY Puts on January 4 for 0.07. Entry was 0.54, so it's a 0.47 loss or $423 in 9 contracts. No more need to keep this hedge as it loses effectiveness so close to expiration.



Note to LTOptions members: This is an extreme measure against the Fed Meeting. Normally I wouldn't use so much hedge that will inevitably eat into my overall profits. Also, the larger a portfolio, the more protection and hedges we will tend to use.

Check out 2016 Track Record

 
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