Hedge 'n Hold

A

abishiai

This is an experiment to see if the Hedge 'n Hold strategy of using stocks and options will work over the course of a year.

Trades in this thread will be 'paper' trades, and I am starting with $10,000.

This plan is simple. Hold the stock. If price increases, re-adjust the puts to lock-in profits. If price decreases, then sell puts, and buy more stock, then re-hedge with more puts.

Today I am opening these positions:

Long 800 ELX @ 17.85, w/50% margin: $7,290.00
Long 8 ELX Apr 15 Puts @ .70: $570.00
Cash balance: $2,285.00

I've 'back tested' this system, and it seems to work very well. However it is difficult to calculate accurate option prices when back-testing since they are not available.

Cheer,

kp
 
why not just buy ATM calls and buy OTM puts. you could use the same strategy as the market moves, but would be putting up much less money upfront. the only disadvantage would be time decay. but if youre trading ELX you will probably be in and out of trades in 2-5 days, so it shouldn't be too much of an issue. i have used this strategy for index options and have found it to work pretty well.
 
As you said it, time decay is the reason.

I haven't done very well with strangles, but I'll admit I haven't done any as you suggested: OTM puts, ATM calls.

This is a strategy I have looked back on time after time and though "if only I had just held that stock..." So, I'm trying it out here.

Thanks for the input. :)

kp
 
Quote from abishiai:

Long 800 ELX @ 17.85, w/50% margin: $7,290.00
Long 8 ELX Apr 15 Puts @ .70: $570.00
More...

If on the expiration day the stock closes @ 15. you lose ~29% of you capital. :eek:
 
Quote from dis:


If on the expiration day the stock closes @ 15. you lose ~29% of you capital. :eek:
More...

Very true, But as I said, I'm in it for a year.

Looking at the volatility on this stock over a year, There is a very good possibility it will move strongly in either direction, at which time I will lock-in profit with puts, or increase size by selling ITM puts and buying more stock.

This is a longer term volatility play.

Cheer,

kp
 
Quote from abishiai:

This is an experiment to see if the Hedge 'n Hold strategy of using stocks and options will work over the course of a year.

Trades in this thread will be 'paper' trades, and I am starting with $10,000.

This plan is simple. Hold the stock. If price increases, re-adjust the puts to lock-in profits. If price decreases, then sell puts, and buy more stock, then re-hedge with more puts.

Today I am opening these positions:

Long 800 ELX @ 17.85, w/50% margin: $7,290.00
Long 8 ELX Apr 15 Puts @ .70: $570.00
Cash balance: $2,285.00

I've 'back tested' this system, and it seems to work very well. However it is difficult to calculate accurate option prices when back-testing since they are not available.

Cheer,
kp
More...

Sell the April 17.50 calls, sell the April 17.50 puts, buy the April 20 calls, buy the April 15 puts, same quantities. If price decreases buy back some of the short 17.50 calls. If price increases buy back some of the short 17.50 puts. Move out to July at expiration, than October etc. selling the ATM strikes and buying the OTM calls/puts.

Good use of capital, avoiding disaster, time decay in your favor. You can tweak this position a little if you want to own the stock.
 
It might be tough to make money this way as the underlying has to make 5% to reach break even. Thanks for keeping us posted though.
 
Quote from abishiai:

This is an experiment to see if the Hedge 'n Hold strategy of using stocks and options will work over the course of a year.

Trades in this thread will be 'paper' trades, and I am starting with $10,000.

This plan is simple. Hold the stock. If price increases, re-adjust the puts to lock-in profits. If price decreases, then sell puts, and buy more stock, then re-hedge with more puts.

Today I am opening these positions:

Long 800 ELX @ 17.85, w/50% margin: $7,290.00
Long 8 ELX Apr 15 Puts @ .70: $570.00
Cash balance: $2,285.00

I've 'back tested' this system, and it seems to work very well. However it is difficult to calculate accurate option prices when back-testing since they are not available.

Cheer,

kp
More...


The position you are describing, long put & stock, is a synthetic long call position. You might as well just buy calls then.
Instead of buying 17.85 stock and selling the 15 put at 0.70 you could have tried to buy the 15 call for 3.57 (parity + put + r/c = 2.85 + 0.70 + call it 0.02) 8 times. This would give you the exact same position and tie up a lot less capital which you could invest elsewhere.

Is there commission incorporated in these numbers, it seems
800 x 17.85 = 14,280 x 50% = 7,140
and 8 x 0.70 = 560
for a cash balance of 2,300 before commissions.
 
It's time to re-hedge the position, and protect the recent move.

This is what I have done in the last 15 minutes:

S: 8 APR 15 Put @ .25: $190.00
B: 8 APR 17.5 Put @ .80: -$650.00

So, my net positioin is:

Long: ELX 800 Shares
Long: ELX 8 17.5 Puts
Cash balance: $1,825.00

BTW, I am figuring $10 for each trade as commissions. I know some places like IB offer cheaper rates, but this seems like a good round number. Also, in my trades I am "shaving" .05 off the bid and ask spread. It has been my consistend experience that with a good broker you can consistenly do this in actual trading.

Cheer,

kp
 
Thanks for all the comment and evaluation of this position / strategy.

My primary reasons for not just buying the calls outright is that I HATE the bid/ask spread in options and I don't like time decay.

The problem with just buying a call is that it will expire in April, and I will have to buy another one then, That means every month I will lose the bid/ask spread on the call for my long positioni, AND if and when it moves in my favor, I have to do the same thing again when I hedge the position to lock-in profits.

Cheer,

kp
 
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