Funny you should resurrect this thread - I was analysing what I did back in 2008 and what would have been the best strategy for analogous reasons to yours.
Whilst I dont think a meltdown is close in time, it does seem reasonable to think of strategies to plan for it in the medium to longer term. If only because there are profits which it would be painful to see vaporise if the market would take a real dive. The problem as always is timing what you want to do - last year in September/October I bought weekly or fortnightly at the money index puts for a 6 weeks or so. It was expensive but I slept better, of course the drop of the market early December17 is the one that actually hurt - the S&P actually dropped only marginally but the big winners of the year took a real step down and my portfolio was down 10% from 1st to 5th of December to get back to level at the end of the year (just for that month). I dont think S&P puts would have protected me adequately.
On two individual positions that had appreciated considerably I tried two different approaches:
- one is that I sold the DeepITM position and bought back at delta-equivalence ATM but with credit in net terms
- the other I bought a collar (i.e. short the call and long the put for a slight credit)
Of course the first position took a deep dive and the second continued appreciating. In both cases it would have been better to do nothing though in the first case the difference is marginal. Had I inverted the experiment both positions would have been better off than leaving things as they were. In any case my conclusion was that as a hedging strategy you have to be directionally individually right for those two tactics to work and its therefore hard to extrapolate this to something that could protect your portfolio. So my quest to prepare for a market downturn has turned back to index options.
The fact you were long puts at the crash and still were out at the wrong time looks par for the course. As I am sure you realise from my musing I havent really got an ideal solution in mind. The one thing that strikes me is that the higher flyers tend to go down faster in case there is a setback so possibly there is some hedging or bearish strategy that could be built on that principle. Bear markets are as a rule shorter and more violent than bull markets so timing is everything but its generally the one thing that is impossible to determine with any certainty.
Do you have view whether from money management and outcome it would have been feasible to hold on to a back-spread or call ratio spread back in 2008?
Whilst I dont think a meltdown is close in time, it does seem reasonable to think of strategies to plan for it in the medium to longer term. If only because there are profits which it would be painful to see vaporise if the market would take a real dive. The problem as always is timing what you want to do - last year in September/October I bought weekly or fortnightly at the money index puts for a 6 weeks or so. It was expensive but I slept better, of course the drop of the market early December17 is the one that actually hurt - the S&P actually dropped only marginally but the big winners of the year took a real step down and my portfolio was down 10% from 1st to 5th of December to get back to level at the end of the year (just for that month). I dont think S&P puts would have protected me adequately.
On two individual positions that had appreciated considerably I tried two different approaches:
- one is that I sold the DeepITM position and bought back at delta-equivalence ATM but with credit in net terms
- the other I bought a collar (i.e. short the call and long the put for a slight credit)
Of course the first position took a deep dive and the second continued appreciating. In both cases it would have been better to do nothing though in the first case the difference is marginal. Had I inverted the experiment both positions would have been better off than leaving things as they were. In any case my conclusion was that as a hedging strategy you have to be directionally individually right for those two tactics to work and its therefore hard to extrapolate this to something that could protect your portfolio. So my quest to prepare for a market downturn has turned back to index options.
The fact you were long puts at the crash and still were out at the wrong time looks par for the course. As I am sure you realise from my musing I havent really got an ideal solution in mind. The one thing that strikes me is that the higher flyers tend to go down faster in case there is a setback so possibly there is some hedging or bearish strategy that could be built on that principle. Bear markets are as a rule shorter and more violent than bull markets so timing is everything but its generally the one thing that is impossible to determine with any certainty.
Do you have view whether from money management and outcome it would have been feasible to hold on to a back-spread or call ratio spread back in 2008?
