Hedging the S&P500

[Laissez Faire]

Looking into some historical prices of the e-mini S&P500 futures contracts and did some quick hedging scenarios. It is a good way to hedge the downside, but the upside gets hit hard if the market goes up. I do like the option play a little better since the prices can grow exponentially which is the type of growth I would need for this hedge to make since.

Or am I still missing something when hedging with futures?

I don't have sufficient knowledge on the subject to make a comparison with options. Maybe someone else could chime in.

Did you plan on hedging NOW or at some specific level/time in the future?

As mentioned - an alternative could possibly be to have a stop sell order resting in the market which you trail below the market.

 

[taowave]

So you want to take a straight (correlation risk) bet with no wiggle room believing you can outperform the S and P??

 

[ironchef]

I currently have a portfolio that was hit hard during the Covid-19 fall that bottomed out this past March (-40%). Thankfully, I'm close to breakeven on the at today. The portfolio is a variation of a Risk Parity portfolio with allocations in Gold, Bond, and Equities.

I did consider this portfolio already hedged with the Gold and Bonds prior to Covid. But now I am looking for some additional hedging. My current thoughts are to buy OTM puts or calls on a variety of S&P500 related items (VIX, SVXY, UVXY, UPRO) that are 6 months out. Ideally, I would be wanting to allocate 0.5% of the portfolio to this option hedge.

I did some quick historical price checking on the options with TOS onDemand feature. Hopefully, these prices are historically accurate. But the only option play that looked promising was OTM UVXY call strikes 6th months out (strike prices 90 and 100) and 1 year out (strike price 180).

The goal of this hedge isn't to see high returns given a down market but to more or less weather the storm. If the market is down 30% and I'm down 10%, I would consider that success.

Looking at buying the OTM calls for UVXY for Jan21, the options are not liquid and have large spreads. So, of course, implementing this hedge isn't as easy as I was hoping.

Are there other hedging strategies or vehicles that I can investigate? Has anyone else discovered a good hedging alternative?

Any insight or feedback is greatly appreciated. Thanks in advance!

I know people will laugh at me for this stupid advice but if I were you and have been fully invested since 2009, I would stay the course and don't hedge.

Your portfolio would have gone up by about 4 X if it is all in SPY. With some luck, it could have easily gone up 10+ X in this historical bull market. So, even if it drops 40% tomorrow you are still up 2.5 time since 2009. The fact that after dropping 40% it is now fully recovered tells you can afford another crash similar to Mar 2020.

Don't time the market. Most of us, once out, do not know when to get back in.

The only hedge I might do is to constantly take some money off the table and put it in a different asset class, perhaps in real estates. The only time I would hedge is when I want to liquidate my portfolio in time (e.g. for tax consideration or for a time purchase commitment), then I put on a no cost collar.

OK, this is from an amateur retail, not from a professional, this is not advice but as an opposing view.

 

[taowave]

That advice beats 99 percent of the "advice" on here..

Only think I would add is to take advantage of super low and super high vol..

I know people will laugh at me for this stupid advice but if I were you and have been fully invested since 2009, I would stay the course and don't hedge.

Your portfolio would have gone up by about 4 X if it is all in SPY. With some luck, it could have easily gone up 10+ X in this historical bull market. So, even if it drops 40% tomorrow you are still up 2.5 time since 2009. The fact that after dropping 40% it is now fully recovered tells you can afford another crash similar to Mar 2020.

Don't time the market. Most of us, once out, do not know when to get back in.

The only hedge I might do is to constantly take some money off the table and put it in a different asset class, perhaps in real estates. The only time I would hedge is when I want to liquidate my portfolio in time (e.g. for tax consideration or for a time purchase commitment), then I put on a no cost collar.

OK, this is from an amateur retail, not from a professional, this is not advice but as an opposing view.

 

[ShameSalad]

I know people will laugh at me for this stupid advice but if I were you and have been fully invested since 2009, I would stay the course and don't hedge.

Your portfolio would have gone up by about 4 X if it is all in SPY. With some luck, it could have easily gone up 10+ X in this historical bull market. So, even if it drops 40% tomorrow you are still up 2.5 time since 2009. The fact that after dropping 40% it is now fully recovered tells you can afford another crash similar to Mar 2020.

Don't time the market. Most of us, once out, do not know when to get back in.

The only hedge I might do is to constantly take some money off the table and put it in a different asset class, perhaps in real estates. The only time I would hedge is when I want to liquidate my portfolio in time (e.g. for tax consideration or for a time purchase commitment), then I put on a no cost collar.

OK, this is from an amateur retail, not from a professional, this is not advice but as an opposing view.

My positions are long in general. I say that I'm hedged or want to hedge just to reduce some of the volatility given a down market or pandemic scenario. With the hedge that I would like to put on, I am not betting on the downside to make high returns, but just to have lesser big swings in my account balance.

So I actually ended up hedging with way OTM calls on UVXY Jan 21 expiration. Backtesting with similar priced options this past January would have done well during the pandemic. And the future projections of the options price given a big swing in the market look good as well. I feel like I can sleep easy now at least that I have some type of plan in place even though maybe it's not the most optimal strategy. I still will lessen my downside given some type of chaos happens this election cycle.

 

[ironchef]

My positions are long in general. I say that I'm hedged or want to hedge just to reduce some of the volatility given a down market or pandemic scenario. With the hedge that I would like to put on, I am not betting on the downside to make high returns, but just to have lesser big swings in my account balance.

So I actually ended up hedging with way OTM calls on UVXY Jan 21 expiration. Backtesting with similar priced options this past January would have done well during the pandemic. And the future projections of the options price given a big swing in the market look good as well. I feel like I can sleep easy now at least that I have some type of plan in place even though maybe it's not the most optimal strategy. I still will lessen my downside given some type of chaos happens this election cycle.

Thank you. So you are hedging using a derivative (options) on another derivative? Too complicated for me, not sure if that is the same as hedging a market downside risk?

I have lots to learn from you.