kmcintyre Legend  Posts: 410 Joined: 8/30/2007 Location: Valley Center, CA  User Profile | Not sure if this should be in the OT or OV forum, but... So I just ended Feb 18 option expiration. I've been hedging with 2:1 ratio put spreads on the QQQ, RUT, and SPY for the last year and a half. A ratio put spread sells one ATM put and buys 2 (or more) slightly OTM puts. The ATM put helps pay for the OTM puts, which serve as a hedge for a portfolio. I finally had a big drawdown. How did the hedging perform? Not as I expected. My intent was to protect against a 3% drawdown. We had a 10% drawdown. But the put options that were placed 3% below the market only had a delta of approximately 50 when the market swooned 3%. As the market continued to drop the delta increased, but so did the bid/ask spreads. At the peak of the crash I was seeing $5 bid/ask spreads on the $2 wide ratio bear put spreads. Yes, my portfolio would have been hedged had the market dropped to zero, but the reality was when I needed to unload the puts to collect my insurance benefit, the market didn't want to buy them. So they really didn't do me that much good. (The market really didn't want tell the puts either. Too much uncertainty. Hence the outrageous spreads.) Lesson learned. If I want to hedge my portfolio with puts, I need to buy puts that will have a delta > .90 at the point where I want insurance to kick in. Using a ratio spread so try to reduce the cost of insurance seriously dampens the IV kicker of a selloff. But even on straight puts, the spreads can get so wide, IV doesn't matter that much. The market makers are going to screw you if you want to buy or sell. I have heard of another way to hedge using futures and options. The idea is to put on a delta neutral trade with put options and long e-minis. If the market rises, the puts lose delta while the e-mini holds a delta of 500. So you make money. If the market drops, the puts gain delta while the e-minis hold their delta of 500, so you make money. Sounds too good to me true. (My guess is that the costs involved might be prohibitive...) Just thought I'd share. If anyone has a tried and true hedging method, please let me know! Cheers! Keith | |
