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Re: Hedging strategies
Old 03-19-2007, 05:05 PM   #21
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Re: Hedging strategies

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Originally Posted by justin
Assuming SPY had a market price of 138 when you bought June-130 SPY puts at 1.18, that means you're paying around 0.85% for the insurance that your losses on the "insured" part of your portfolio are limited to no more than 6-7% for the next ~3 months? Just trying to make sure I'm analyzing this the correct way.
You must also consider that wab is using SPY as a proxy for his portfolio. There is probably good correlation, but if one stock or sector decides to tank, it might impact the portfolio and have little impact on the SPY.
Quote:

Plus you get to keep all dividends paid (if any) prior to exercise (if it happens), right?
Well, he gets to keep any dividends on the stock he didn't sell, of course. But the buyer of a put does not receive dividends, you need to hold shares for that.

http://www.cboe.com/LearnCenter/Conc...d/general.aspx

I'd agree with chinaco - the best hedge is to simply sell. You cannot lose money on what you do not own. Hedges cost money, if the stock does not go down, you ate into your profits. It can make sense to hedge if you do not want to sell for tax reasons, or to lock in a stock price on employee options that you cannot exercise yet.

Otherwise, it's kind of an emotional thing - which can be useful. If, by having the 'insurance' of a protective put, it helps to keep you in the market and participate in an upswing that you may have missed entirely, it could be well worth it. I think this is what wab is trying to do. I have done it when I really wanted to hold a stock through an earnings announcement, but was afraid bad news could tank it. It's like any insurance, you can't really expect to profit from it directly, but the protection it provides may be worthwhile.

-ERD50

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Re: Hedging strategies
Old 03-19-2007, 06:25 PM   #22
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Re: Hedging strategies

Quote:
Originally Posted by ERD50
I'd agree with chinaco - the best hedge is to simply sell. You cannot lose money on what you do not own. Hedges cost money, if the stock does not go down, you ate into your profits. It can make sense to hedge if you do not want to sell for tax reasons, or to lock in a stock price on employee options that you cannot exercise yet.
You lose all possible upside by selling. I could have done a zero-cost collar if I wanted to lock in gains without selling, but I just want to insure against some downside risk.

Looks like I've already paid some tuition, though. Found an options calculator here:

http://www.ivolatility.com/calc/

The options closer to in-the-money seem to be better deals with lower IV.
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Re: Hedging strategies
Old 03-19-2007, 06:42 PM   #23
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Re: Hedging strategies

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Originally Posted by wab
The options closer to in-the-money seem to be better deals with lower IV.
That's pretty much been the case with index options since the 1987 crash. The lower the strike, the higher the implied volatility. I believe it's because gap moves in indexes tend to occur more on the downside (like '87). In general, very bad down days are worse than very good up days are good, so the market makers price options accordingly, since it's the gap moves that upset their hedges.
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