Hedging your portfolio against market down swings?

[SteveH]

Don't hedge. You'll most likely end up compounding your mistakes. Even hedge fund math geniuses F it up.

Do something more financially productive like cutting your losses quickly.

See qullamaggie vids on YouTube.

 

[getthatintoya]

all three are really bad hedges against market downturns

1. Puts have a risk premium for correlation and gamma, so you'll overpay for them
2. short position on index futures is not a hedge since it completely neutralizes your delta
3. VIX futures have a gammut of secondary order risk

The best hedge for retail is a tail hedge aka. sell the wings, buy the tail -> sell 25 delta puts to buy more 5 delta puts

You'll most likely receive enugh $prem for the 25 delta to finance your crash protection or at least reduce the bleed to an acceptable amount. It is a gipsy hedge since it's only crash protection, but a put ratio is easy enough to manage for retail

I use this sometimes on very short dte. What dte did you have in mind when doing this setup?

 

[gkishot]

Don't hedge. Your long stocks are already hedged if no leverage is used.

 

[MrMuppet]

I use this sometimes on very short dte. What dte did you have in mind when doing this setup?

every DTE where the tails are underpriced/wings are overpriced. You need to buy the hedge when nobody wants it

 

[Global OptionsTrades]

Just looked at this for Sep expiry.

With SPX at 4100, Sell 1 x 25 delta (3890) Put at 53 and Buy 6 x 5 delta (3450) Puts at 10 each provides protection if the index falls by c.22% or more (to c.3180) in 49 days.

Given that the OP's question is about protecting a long portfolio, would replacing the funding of the protection by selling an OtM put with selling an OtM call be more useful?

e.g. Sell 1 x 25 delta (4300) Call at 38 and Buy 4 x 5 delta (3450) Puts at 10 provides protection if the index falls by 21% or more (to c.3240) but more importantly shows much lower net loss on the way down. e.g. a 10% fall in the index (to 3690) would be a net loss of 15% selling the put, but 10% by selling the call.

I guess there are margin considerations, and if the index rises, there is a covered call to manage, but seems like a potentially better way of meeting the OP's requirement?

 

[MrMuppet]

Just looked at this for Sep expiry.

With SPX at 4100, Sell 1 x 25 delta (3890) Put at 53 and Buy 6 x 5 delta (3450) Puts at 10 each provides protection if the index falls by c.22% or more (to c.3180) in 49 days.

Given that the OP's question is about protecting a long portfolio, would replacing the funding of the protection by selling an OtM put with selling an OtM call be more useful?

e.g. Sell 1 x 25 delta (4300) Call at 38 and Buy 4 x 5 delta (3450) Puts at 10 provides protection if the index falls by 21% or more (to c.3240) but more importantly shows much lower net loss on the way down. e.g. a 10% fall in the index (to 3690) would be a net loss of 15% selling the put, but 10% by selling the call.

I guess there are margin considerations, and if the index rises, there is a covered call to manage, but seems like a potentially better way of meeting the OP's requirement?

you can do that but you will cap your upside that way...and a covered call is the same as a short put...just saying

 

[JustAnotherCog]

Sometimes, simply diversifying can be the answer. Also holding short and long positions as part of arbitrage techniques. So long on one company and short on another company in the same sector. Of course, you want to be long on the company which is in your opinion showing greater future potential than the other. Then if the markets crash or are affected by an event, both positions will be affected to a 'similar' extent and you will gain on one and lose on the other, thus shielding you from the market move/event. Of course, you need to ensure that your exposure on each position is equally weighted.

 

[murray t turtle]

OP was presenting hedging strategies. I trade derivatives for a living and was presenting an alternative.
This has nothing to do with making money, because there is no edge in a hedge.
I don't care about your P/L as you shouldn't care about mine

%%

Great quote Mr M \no edge in a hedge; maybe true in a futures sense\ didnt work to well in 1987, for many.
[2]But its also used in a broader sense '' he or she hedged his earlier comments with new management ''-M Webster definition................
[3,4,5]Gold ,silver are a hedge against inflation [m webster again], but you may be a better trader/investor than Webster or have done better than those hedges.
6,7]Real Estate could a be good inflation hedge, good edge sometimes not for the newbies that panic bought non appraised RE\LOL Sorry
-Mr M TT