Best way to protect/insure position...Options strategy (which one) or other method?

[dickey7]

Have decided 2 things recently.... (1) The best way to grow net worth is to have full amount fully invested in market (all eggs in). (2) Have to have some sort of downside protection/insurance. (market last few weeks....)

So the question is, what is the best way to accomplish #2. Example, say full portfolio is $500k and I want to put all in SPY or another single stock. How do I protect it (cost effectively) against events such as what has transpired the past couple weeks....? I fully understand I will give up some upside value, but how much - what is the cheapest way to do so (while still having some upside and perhaps capture dividends).

Another example - Oil stocks....if you didn't have some form of downside protection, shew buddies...

What do you have to give up, upfront cost or upside potential, to have decent downside protection from large move downward.

Outright puts seem too expensive, and have a specific time frame dynamic to them. If cost was a few % points a year, it would still be worth it to me.

What other options are there - Straddle, Put ladder, Collar, Condor....?

 

[newwurldmn]

If you aren’t investing with pledged or borrowed funds, I would forgo #2.

The cost of hedging will generally be a significant headwind.

Do the following analysis - if you hedged from jan2019 to now. What would your return be and we had one of fastest selloffs in recent history.

 

[smallfil]

You are gambling if you put all your monies at risk. Much like going to Las Vegas and hoping to win a lot. That said, if you want to go that route, you would have to insure it with put options at that strike price. Say XYX stock, you put in $500,000 and you have 1,000 shares at $500. You would need to buy 10 contracts (100 shares for each contract) of a put option say it cost $600 per contract. That is $6,000 protection, assume the strike price is $500 of the option contract. So, whatever happens say in the next 3 months, you are guaranteed to be able to sell your shares at $500 even if the stock tanks and drops to $400 or lower. That said, it cost you $6,000 so, it cost you a total of $506,000. That takes care of your downside. If XYZ rises in those 3 months, and goes to $700 per share, you have made monies now. So, you have $700,000-$500,000=$200,000 profit net the cost of the put options of $6,000 or a net profit of $194,000. If it instead, drops to $400 then, you can still have right to sell your shares at $500 and get your $500,000 back but, your option when you exercise and sell the stock at $500, you lose the extrinsic or nominal value of the option so, you end up losing that $6,000. So, worst case scenario is you lost $6,000 the cost of the put options if the stock drops. If it goes up, you will turn a profit. If you want to continue protecting your stock position, you would have to buy a new put option contract in the succeeding months to replace the expired put options.

 

[tsfx]

How do I protect it (cost effectively) against events such as what has transpired the past couple weeks....? I fully understand I will give up some upside value, but how much - what is the cheapest way to do so (while still having some upside and perhaps capture dividends).

Outright puts seem too expensive, and have a specific time frame dynamic to them. If cost was a few % points a year, it would still be worth it to me.

What other options are there - Straddle, Put ladder, Collar, Condor....?

Your request is a little bit odd. What are you expecting ? To get a price better than the market ? Options have a market price, doesn't matter what's your options strategy. All options are nothing but puts and calls which you buy or sell (leaving everything else out atm for simplicity). Trading options has the same approach as trading the underlying, you need to have a strategy.

If outright puts are too expensive for you then you need to give up some directional benefit for the sake of lower premium paid.

in one word, protection costs money (like in real life). There is no FIXED arbitrage where something is cheaper than the other but the the benefit is the same. If there were then why would you bother buying stocks in the first place ?? There is a dynamic arbitrage though but that's a whole different subject

 

[dickey7]

I guess what I’m seeing is that a put around current price (assuming you buy underlying at current price and purchase put at same time), for 6 months out, costs around 8% of stock price. Seems way too high to me, has to be a cheaper alternative. Would be 16% per year (granted implied volatility is high right now). Nonetheless as mentioned by newwurldmn, that’s significant headwind to hedge...

what’s the cheaper alternative. Give up some upside for less downside risk.

 

[smallfil]

I guess what I’m seeing is that a put around current price (assuming you buy underlying at current price and purchase put at same time), for 6 months out, costs around 8% of stock price. Seems way too high to me, has to be a cheaper alternative. Would be 16% per year (granted implied volatility is high right now). Nonetheless as mentioned by newwurldmn, that’s significant headwind to hedge...

what’s the cheaper alternative. Give up some upside for less downside risk.

There is no cheaper alternative. Common sense dictates you use proper risk management and risk no more than 2% per trade. In that case, if you took 5 positions, the most you would lose is 10% of your capital assuming you lose all 5 trades. Since, you are risking 100% of your capital, you are guaranteed to blowout and lose all your capital. All you need is one losing trade to blowout. You are chasing returns like a gambler instead, of an educated trader.

 

[tsfx]

I guess what I’m seeing is that a put around current price (assuming you buy underlying at current price and purchase put at same time), for 6 months out, costs around 8% of stock price. Seems way too high to me, has to be a cheaper alternative. Would be 16% per year (granted implied volatility is high right now). Nonetheless as mentioned by newwurldmn, that’s significant headwind to hedge...

what’s the cheaper alternative. Give up some upside for less downside risk.

Again, you are asking for some magical fairy dust. If there were cheaper alternative to market prices then you’d have an arbitrage opportunity by buying the fairy dust and selling market

Btw, buying stock and simultaneously buying puts is the same as simply buying a call. And yes, that kind of thinking leads to a long term loss.

 

[traderjo]

There is no magic , you have to play with nos using diff options
Buy ATM PUT + Sell OTM Call
Buy ATM PUT + Sell OTM Call spreads
If your long is SPY ... might be able to hedge temp using short ETF ! or ES or SPX futures in ratio.

 

[tsfx]

There is no magic , you have to play with nos using diff options
Buy ATM PUT + Sell OTM Call
Buy ATM PUT + Sell OTM Call spreads

that's a skewed straddle favouring downward delta. It basically has the same value as saying "buy when stochastic crosses upwards and sell when downwards." No edge in that activity.

If your long is SPY ... might be able to hedge temp using short ETF ! or ES or SPX futures in ratio.

That's not a hedge, that's called closing a position (or partially closing a position)

 

[dickey7]

How about....Buy stock/ETF, then buy and sell the same strike put. Which I would guess is not allowed in the same brokerage account (because would close out the position). Could use two separate broker accounts, but likely illegal....?