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kmcintyre

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Joined: 8/30/2007
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Subject : RE: ATM Hedging feature
Posted : 6/9/2018 1:22 PM
Post #44787 - In reply to #44095

That has been my empirical observation.

A protective put is an insurance policy. But the questions are -
1) how do you file a claim
2) when do you file a claim

The how could be as simple as "sell your put". But then you have no protection. So maybe you roll the put. Out, down, down and out? Or maybe sell a put against the ITM insurance policy? a calendar or a credit spread?


The options are myriad. pardon the pun...

This I know - when you want to cash in on the insurance, when there's blood in the streets, the spreads are TERRIBLE.

Which gets to the when question. Protective puts look great as unrealized gains as the market tanks. If you hold them until expiration you risk a bounce back (great for the rest of the portfolio) which cuts deep into the unrealized profits. You end up paying for protection you never used, and really didn't need, assuming patience to wait for a rebound in the market.


Exercising the put takes a lot of cash (the size of the portfolio being protected by the puts!) and leaves 2x the original portfolio exposed to further downside movement. Hummm...

And as I mentioned, trying to time the bottom and selling the puts is difficult because IV is typically very high, causing bid/ask spreads to swell. The puts are a hot potatoe...

But for some, having a smoother unrealized equity curve is worth the price of admission.

Protective puts - no free lunch. IMO

Cheers


Deleting message 44787 : RE: ATM Hedging feature


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