Reducing Stock Portfolio Volatility with Options

M

marshg

Hi:
I was hoping to use options to reduce the monthly volatility in my stock/mutual fund portfolio. I know one can buy puts, but that ends up being quite expensive or only offers protection at a very draconian level [say when mrkt sells off over 10% or more].
I know others recommend selling covered calls, but that limits upside.
Does anyone know of a less expensive more effective strategy than either of this, which does not require more than monthly adjustments?
ex. I wondered if buying both puts and calls that would be soonish to expire made sense as you'd sometimes make up on the upside the premiums lost on the downside; and perhaps if the options were a long enough expiration they wouldn't lose too much time premium if you rolled them over into new ones?
In other words, I'm open to suggestions or someone pointing me to an article that have done some research [academic or from experience] on what works well.
thanks!
Marshall
 
Quote from kalashnicac:

Collars : sell OTM call, buy OTM put. That'll reduce volatility.
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The short leg will limit upside potential like the OP said he doesn't want to do.

OP check out Lehman and McMillan "New Insight on Covered Call Writing". They cite a study which concludes that CC writing (BXM index) only lowered S&P return over 13.58 years from 14.07% to 13.88% with much less volatility. Plus the BXM usually outperformed the S&P in years when the S&P returned less than 21%.
 
do you want to reduce volatility or hedge direction? reducing vol would require you to sell vol of you portfolio. basically a dispersion type trade. treat your portfolio as a basket and then get the weighted avg variance and avg correlation. with that you can then sell straddles/strangles of the underlyings.
 
thanks for the various responses--and I'm open to more if anyone else has creative ideas?
re: "Do I want to reduce volatility or hedge direction? reducing vol would require you to sell vol of you portfolio. basically a dispersion type trade. treat your portfolio as a basket and then get the weighted avg variance and avg correlation. with that you can then sell straddles/strangles of the underlyings."
-I'm pretty much interested in reducing downside loss/volatility. I feel confidence in the long-term asset allocation/approach I'm taking, but find it unpleasant to stomach the short-term sell-offs, which can actually b e more severe than how the portfolio/allocations have performed annual [based on 30+ years back-testing]. I'm willing to give up some of the returns for greater stablity, but when investigated buying puts it seemed too expensive.
 
Quote from marshg:

thanks for the various responses--and I'm open to more if anyone else has creative ideas?
re: "Do I want to reduce volatility or hedge direction? reducing vol would require you to sell vol of you portfolio. basically a dispersion type trade. treat your portfolio as a basket and then get the weighted avg variance and avg correlation. with that you can then sell straddles/strangles of the underlyings."
-I'm pretty much interested in reducing downside loss/volatility. I feel confidence in the long-term asset allocation/approach I'm taking, but find it unpleasant to stomach the short-term sell-offs, which can actually b e more severe than how the portfolio/allocations have performed annual [based on 30+ years back-testing]. I'm willing to give up some of the returns for greater stablity, but when investigated buying puts it seemed too expensive.
More...

"unpleasant to stomach " and "buying puts it seemed too expensive" are mutually connected ; high beta stocks will do both.
 
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