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Hedging with SPY options


rijk
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paying for the otherwise excessive option insurance costs by over-insuring and selling short term puts against long term calls (or puts) seems like an interesting idea

 

-does anyone use this strategy? what are your experiences?

-the viability of this strategy is based on the premise that option pricing places more value on something that is close than way in the future, if this is a fire-proof strategy, then why not forget about long equity investing and make long/short (maturity) option trading your main activity?

 

regards

rijk

 

http://seekingalpha.com/article/294438-hedging-with-options-using-spy-as-an-example

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please read the articles, the interesting part about this strategy is that insurance costs are offset with premiums earned from selling covered puts on a weekly basis.....

 

not really interested in gold.....

 

regards

rijk

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Why dont you set up a spreadsheet and see it would have worked over the past year.  I wouldn't bother personally - I have no trouble buying when the markets have tanked and selling into rallies.  I also have no problems taking up to 20 percent hits - above that and i get jumpy.

 

Problems I see:  taxes with all this trading.  One cannot report your losses due to wash rules, but you have to report your gains.

 

Option trades are expensive - factor in 70 x 52 intrading costs. 

 

A huge amount of effort, discipline, and maintenance required.  If one cannot buy into a plunging market and sell into a rally, where is one going to find the discipline to stick tightly to the outlined program. 

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i have little doubt that the hedge piece of the strategy will work fine...

 

the trickier piece will be to recover the insurance costs by selling weekly puts, which i think is more difficult to simulate in a spreadsheet

 

tax implications and trading costs are good observations....

 

as the author mentions in the articles, you can fine/tune this strategy endlessly, making it high maintenance/time consuming, however, the strategy itself doesn't need that much attention/maintenance, once the annual short/call or put is in place, you only need to repeat one transaction, selling the weekly puts, once a week, this shouldn't take more than 15 mins/week

 

regards

rijk

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