Hedging

[osho67]

I have got a sizeable portfolio of US stocks - mostly above 30bn market cap ones and I have written calls against most of them. I would like to hedge value of my portfolio and I was reading Murphy on this subject. It is quite complicated and I would like to take some simple approach. There are many experienced option traders on this site and I would much appreciate comments and guidance. If there are articles or some books , please give details as well. Thanks so much for help.

 

[RogerM]

Osho - from a simplistic point of view you could use the premiums taken from the short calls to buy puts in the same stocks. This may defeat your objective tho' of generating income from your portfoio.

It depends on how much you want to hedge. If your hedge is not so much stock specific as a protection against catastrophic geo-political events, then you could put on a split strike short synthetic on either the S&P or Nasdaq (maybe thru QQQ). So you could sell calls above the index and buy puts below in quantities which reflect the overall value of your portfolio. This is not without its own risk tho. If share prices rise sharply, your profits from your share portfolio will be capped at the level at which you have sold calls, whereas your synthetic will lose you money for every point it rises above the short call strike price.

You could do the synthetic on a 2 for 1 basis so that you could sell a greater number of calls higher up to raise the same level of premium. Or buy cheaper puts lower down so that even tho' you are not fully hedged, you will be protected against the most catastrophic moves in the index.

 

[osho67]

Dear RogerM

Thanks for your input on hedging. This could be a important topic for monet management but is not much mentioned. Is there any sider discussion on this subject here on T2W or elitetrader or anywhere else. I tried to read McMillan but found it very complicated. At the moment I have earnrd premium more than my potential losses but it will be good to put in place some insurance.I would like to read more on this subject so any help will be much appreciated.

Thanks

 

[anley]

Options are a lousy hedge because they're wasting assets.

What happens if you spend 2% of your portfolio on puts and the market over 3 months goes nowhere. Then you spend another 2% for 3 months and again nowhere, then again and again. After a year the market has gone nowhere (which indeed it has from July 2003-present) and you've lost 8% - Some hedge!

 

[RogerM]

anley - that's why I suggested selling calls to pay for the puts, but with the limitations I set out above. Ultimately, in all trading, a risk has to be taken - it's just a case of deciding which risk, over what time-frame, and how much.

 

[Robertral]

Options are a lousy hedge because they're wasting assets.

What happens if you spend 2% of your portfolio on puts and the market over 3 months goes nowhere. Then you spend another 2% for 3 months and again nowhere, then again and again. After a year the market has gone nowhere (which indeed it has from July 2003-present) and you've lost 8% - Some hedge!

Why do you insure your house then!!!!!!!!!!!! think about it.....any 'insurance' is a wasting product....you are paying for the peace of mind........