Yikes! A lot of insults - buying puts to protect a portfolio is not cheap -VIX is still 35. Curious you mention portfolio insurance- that died in '87 - I was there!
The Beauty of Options - Portfolio Insurance at a Discount
- Thread starter Sweet Bobby
- Start date
For those of us who may be curious, do you mind sharing how you reduce the cost of your puts?
I dont believe there is such a thing as a free lunch, but if you share how you reduce your put cost, others reading the forum can decide if that type of risk is palatable to them, and potentially make adjustments or variations for themselves.
I dont believe there is such a thing as a free lunch, but if you share how you reduce your put cost, others reading the forum can decide if that type of risk is palatable to them, and potentially make adjustments or variations for themselves.
There's no free lunch, but I put the odds in my favor. I sell puts that are way out in time, then I buy more puts that are closer in time. At the same time, I put in an order to buy puts in the same expiration that I sold, but at a lower price than they are currently in the market. As time goes by, those orders fill and I automatically sell more puts even further out in time. It's almost as though I have a put factory going. I sell some, but I buy much more all the while collecting more money for the ones that I sell than I spend for the puts that I purchase.
Keep in mind, puts are more expensive the further out in time that you go. So I sell in an expiration where I can collect more premium. Then, I buy puts in an expiration where I can do so a bit cheaper. Damn I'm good! Some of my trolls can criticize me all they want, just don't get in the way of my ATM machine! The machine is tired, but she's still printing cash!
So you are trading calendars/diagnols 
Admittedly,I thought you were bsckspread..
So you are short the time spread(assuming same strike)When you say you buy more puts closer in,it sounds like you are long puts on balance,which your graph shows..
The machine is tired because vol is lower
Admittedly,I thought you were bsckspread..
So you are short the time spread(assuming same strike)When you say you buy more puts closer in,it sounds like you are long puts on balance,which your graph shows..
The machine is tired because vol is lower
So you're always short put calendars (long front, short back), then eventually buy back your short long-term puts at a lower price, while simultaneously establishing a new short position further out on the term structure. In short you're scalping your back end to finance your permanently long front end puts.
You must lose money though when your front end decay exceeds your back end scalps, and you can lose big rolling your calendars when the term structure is steep (front month IVs far exceed back month IVs) like it was in March and April of this year, and leave a lot of money on the table if you aren't actively scalping your gamma to cover your big decay bill. Were you selling out your short-term longs during those big March and April moves? Your short calendars must have been winners during those big down moves, but not so great when we're range bound and the term structure (calendar IV differential) is flatttening out.
Can you give an example of your current position? What DTE and strikes?
I can see how your strategy would work, since I've taken the opposite side of the trade and have suffered during downturns. I believe your position is usually negative theta, so it's not free insurance. However, it's probably a lot cheaper than outright buying puts. Overall, it seems like a solid strategy.
I can see how your strategy would work, since I've taken the opposite side of the trade and have suffered during downturns. I believe your position is usually negative theta, so it's not free insurance. However, it's probably a lot cheaper than outright buying puts. Overall, it seems like a solid strategy.
How far out?
I am out anywhere from 90 -150 days out. Yes, the hedge structure is negative theta, though with options far out in time the theta is not as detrimental as you might believe. So, I am able to sell naked income puts with the hedge in place. How many do I sell? That decision comes entirely from the analyze tab in think or swim. I analyze the naked income puts to make sure my portfolio can absorb them in the event of a downside move.
My income puts are usually 99%+ positive and I adjust the strike delta depending on the VIX. I simply enter the volatility in my spreadsheet and it tells me the delta I should sell.
My spreadsheet also tells me how I should manage the trade be it at 30% or 40% profit. And the DTE of my naked puts are shorter than merges, so I can sell several cycles against my hedges. I also eventually harvest my short hedge puts before they get too close to expiration and let my long puts go to expiration.
The plan is to sell premium while hedging to the downside. I never have any calls I. The portfolio, so there’s never any risk to the downside. I find it easier to just manage risk on one side of the market, and I manage risk to the downside. Hopefully, this addresses the questions above. If I failed to address something, let me know!
My income puts are usually 99%+ positive and I adjust the strike delta depending on the VIX. I simply enter the volatility in my spreadsheet and it tells me the delta I should sell.
My spreadsheet also tells me how I should manage the trade be it at 30% or 40% profit. And the DTE of my naked puts are shorter than merges, so I can sell several cycles against my hedges. I also eventually harvest my short hedge puts before they get too close to expiration and let my long puts go to expiration.
The plan is to sell premium while hedging to the downside. I never have any calls I. The portfolio, so there’s never any risk to the downside. I find it easier to just manage risk on one side of the market, and I manage risk to the downside. Hopefully, this addresses the questions above. If I failed to address something, let me know!