Portfolio Hedging Suggestions...

[TheGoonior]

I have an IRA portfolio consisting of mostly ETF (IWM, GDX, EEM, IYR, UNG).
I'd like to hear any suggestions people have on strategies to hedge this portfolio against major (15% or more) downturns.

Right now my plan is to buy OTM calls on the VIX (say on a monthly or quarterly basis).
These would be a fair ways OTM (say strike of 20 with VIX at 13 as an example) with the idea that I can purchase a larger number of low priced calls to give me a potentially much larger delta in the event of a major down move. I'd prefer to not just buy puts, as gradual uptrends will make my put less and less effective the further price moves from the strike. VIX seems to have much more of an embedded trend.

Any other suggestions on hedging?
I'd say I'm willing to pay 1-2% of the portfolio value as my annual insurance "premium". I also have no issues with shorter term rolling if the strategy would involve that. This is with IB, so I think most strategies are available (except short equities).

Thanks for your help.

 

[Arnie]

Why not just add something like TLT or TIP to balance it out. If this market does a slow grind up, all your hedging will do is eat up cash.

 

[TheGoonior]

Thanks Arnie. I'd forgotten about those. TIPS is a little light in the volume, and doesn't have weekly options, but TLT might not be a bad addition to the portfolio.
I neglected to mention that I typically just do a buy-write on OTM one strike out on the underlying (or sell puts until assigned followed by calls until assigned).

Adding TLT with that strategy should help offset some of the VIX premium, but I still need to hedge a decent part of the portfolio against the big moves.
I'd need to be long a bunch of TLT or DITM options to protect the overall portfolio and that would tie up a large amount of capital.

 

[ogarbitrage]

I have an IRA portfolio consisting of mostly ETF (IWM, GDX, EEM, IYR, UNG).

Ratioed VIX call spreads.
EEM outright puts or low-cost collars.
GDX outright puts or low-cost collars.

Just sell UNG - it's a constantly decaying asset. Why even own it?

 

[TheGoonior]

Ratio'ed VIX call spreads.
EEM outright puts or low-cost collars.
GDX outright puts or low-cost collars.

Just sell UNG - it's a constantly decaying asset. Why even own it?

The huge sell off in UNG has sort of stabilized somewhat since 2012 and the weekly premiums are attractive enough to keep it in there. It's a small portion of the portfolio and kind of marches to its own drummer. If it stops working, it'll get the boot. I would do covered puts, but can't do that in an IRA.

I looked at some call backspreads on VIX, but once you start getting a few strikes out, you might as well just own the calls directly. Ratio spreads near ATM would tie up a fair amount of capital to hedge the full portfolio.

In decent sell offs, VIX can easily double (it went from 20-90 during the 2008 fall). This is the main reason I looked in to OTM VIX calls directly. As an example, I can buy 50 delta with 2 calls at 25, 5 calls at 10, or 50 calls at 1, which gives me vastly different results during a major meltdown.

 

[ogarbitrage]

VIX is a good option for the entire portfolio. I started purchasing OTM calls in the front 2-3 months to hedge my own equities and I roll the calls to lower strikes on large up days in the S&P.

As someone who watches natgas every day, I still don't see the rational behind the UNG position. If it's a play on the LNG arb closing or something, there are vastly better vehicles (LNG, GLNG, GLOG).

Also, I didn't mean writing covered puts. I meant getting into collars (aka "fences) - meaning you are long a put and short a covered call. The sale of the call offsets some/all of the put premium and you're into a hedge for low- or no cost. When hedging my own equities, I often combine calendar spreads into my fences by purchasing front month puts and selling 2nd or 3rd month covered calls. I usually hold the call and roll the puts as needed.

 

[TheGoonior]

As someone who watches natgas every day, I still don't see the rational behind the UNG position. If it's a play on the LNG arb closing or something, there are vastly better vehicles (LNG, GLNG, GLOG).

LNG looks interesting from a liquidity and options standpoint. How is that thing in such an uptrend, though? Their earnings are in the red as far back as I could see and not a single positive quarter?

 

[ogarbitrage]

They have export facilities under construction and will be the first to take advantage of the international natural gas arbitrage.

 

[optstack]

I have an IRA portfolio consisting of mostly ETF (IWM, GDX, EEM, IYR, UNG).
I'd like to hear any suggestions people have on strategies to hedge this portfolio against major (15% or more) downturns.

Right now my plan is to buy OTM calls on the VIX (say on a monthly or quarterly basis).
These would be a fair ways OTM (say strike of 20 with VIX at 13 as an example) with the idea that I can purchase a larger number of low priced calls to give me a potentially much larger delta in the event of a major down move. I'd prefer to not just buy puts, as gradual uptrends will make my put less and less effective the further price moves from the strike. VIX seems to have much more of an embedded trend.

Any other suggestions on hedging?
I'd say I'm willing to pay 1-2% of the portfolio value as my annual insurance "premium". I also have no issues with shorter term rolling if the strategy would involve that. This is with IB, so I think most strategies are available (except short equities).

Thanks for your help.

One possible hedging strategy is to use collars. A collar is a strategy where you buy an OTM put and sell a OTM call on the same underlying.

Depending on your strike selection, you can create what is called a "zero-cost" collar, where the cost of the purchased put is offset by the credit received from the short call.

You can collar each of your individual ETF's, or you can collar a beta-weighted value of your overall portfolio using a proxy such as the S&P 500.

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