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How would you Hedge the Market?


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I have a position trading at an all time high, with massive unrealized gains, in this market. I don't want to sell and pay a huge tax bill. Ideally, if it was my retirement portfolio, I'd just sell and have cash as a hedge. So in this case I guess I can buy puts on the stock. But it's not like I need to hedge this stock specifically.

 

I don't mind betting against anything, like the Bill Ackman trade for instance, but that's for professionals only. I just want to ensure that I have cash in case things cheapen, while taking risk off the table.

 

Puts on the obvious targets (airlines, cruises, hotels) are likely too expensive since the volatility is priced in. So what would you do? I was thinking of buying them on the least obvious targets - FAANG. Short to medium term, fairly out of the money, in order to minimize cost. Is this the right way to do it? Other then equity puts any other ideas?

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I have a position trading at an all time high, with massive unrealized gains, in this market. I don't want to sell and pay a huge tax bill. Ideally, if it was my retirement portfolio, I'd just sell and have cash as a hedge. So in this case I guess I can buy puts on the stock. But it's not like I need to hedge this stock specifically.

 

Third sentence seems key--you say, "I would sell if tax concerns didn't matter."  Seems like you are getting twisted in the wind by a host of other factors.  Certainly I would argue that your other hedge proposals add incremental risk for your existing position rather than decrease it.  If you hedge with a different underlying, you need to make a judgment about future correlation to your current "problem" position. 

 

The last sentence seems precisely wrong.  The one thing you need is to hedge this stock specifically.  Reducing exposure is the way to do this, via full sale, partial sale, long put options in that stock, collars, etc. 

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What I like to do is have massive unrealized losses to offset any gains I might have in other names.  If you need tips on how to get these sort of losses just PM me for details/stock tips

 

This is my favourite post for some time.

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I have a position trading at an all time high, with massive unrealized gains, in this market. I don't want to sell and pay a huge tax bill. Ideally, if it was my retirement portfolio, I'd just sell and have cash as a hedge. So in this case I guess I can buy puts on the stock. But it's not like I need to hedge this stock specifically.

 

Third sentence seems key--you say, "I would sell if tax concerns didn't matter."  Seems like you are getting twisted in the wind by a host of other factors.  Certainly I would argue that your other hedge proposals add incremental risk for your existing position rather than decrease it.  If you hedge with a different underlying, you need to make a judgment about future correlation to your current "problem" position. 

 

The last sentence seems precisely wrong.  The one thing you need is to hedge this stock specifically.  Reducing exposure is the way to do this, via full sale, partial sale, long put options in that stock, collars, etc. 

 

I could have worded it better. I'm okay holding the stock for the long term even at its current price. The only reason I would sell now to raise cash for a market downturn, which I know that's blasphemy for many on this board. However, by selling and paying taxes it's stupid, so trying to think of other ways to do that. I don't think this stock is particularly overvalued (though compared to the beaten down shit out there, perhaps it's an opportunity cost holding it).

 

You're right that buying puts on specific stocks may add incremental risk. So maybe a broad market put (like on the S&P 500) is the best thing to do? Overall volatility has come down though still higher than it was in February. Any other ideas?

 

I just want fire power in case of a pullback, while not overpaying for the insurance to get there.

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Put option on the market (SP500) or short the market (SPY) is how it would do it if I worry about market risking stock specific risk.

It is not  a Perfect Hedge, but should work OK in a market meltdown scenario and is liquid.

 

Since put options are still pricy ( high VIX) I would just short the market right now most likely.

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As someone suggested above, why not go for a collar (long put and short call).  If you're buying close to ITM the costs generally offset.  You'll have downside protection in exchange for further upside.  Effectively selling without the taxes (for the duration of the options) - just know that if you do get called or need to buy back the option at higher price you need to put in more money, either to the IRS or to the counterparty, so make sure your expiry dates are appropriate. 

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