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AnonymousKushal Mehta:
@igor @Anya Sheth @Frank Boet. Guys can you help with some strategies on how can we hedge our portfolio? Should we buy some 60-90 days -> 30-40 Delta SPY / SPX Puts? (edited)Igor: Hedging is one of those topics that will never give you the exact answer you might be looking for.
However, we can discuss certain guidelines you may want to follow when you’re looking to protect your portfolio.
The first thing you want to understand is WHAT exactly are you hedging. If you’re holding a bunch of OTM calls that expire in couple of weeks will need a different hedge than a long stock position that you’d like to hold for 5+ years.
Igor: The short answer to beta weight your long position to SPY and that will tell you “how many SPY shares you’re long”. In other words, what’s your exposure in SPY terms. From there you may look at different hedging strategies and decide how much SPY exposure you need to remove.
Igor: If let’s say I beta weight my positions to SPY and I get 400 SPY delta. Delta simply means how much your portfolio will gain or lose based on $1 move in the price of the underlying. A 400 SPY delta portfolio will make or lose with $1 move in the price of SPY.
Igor: If I felt that I need to remove 1/2 of my portfolio exposure without actually selling any of my holdings then I need to figure out how to reduce my SPY delta from 400 to 200 (removing 1/2)
I can short 200 shares of SPY and this will take my portfolio delta from +400 to +200Igor: Another way to do it is to buy (4) 50 delta puts in SPY
Puts are negative delta options. An ATM put is about -50 delta. Adding 4 of those will add -200 delta to my +400 delta portfolio and will NET my delta from +400 to +200lively2019: @igor what’s your opinion on DTEs for these hedges? At what point does the theta burn negate the delta hedge?
Tom King: My 2c. I echo what @igor is saying. For DTE, you need to look at what you are trying to hedge as Igor mentioned and WHEN do they expire? If your portfolio is made up of 30 DTE swing trades, then there’s your answer on DTE. If you want to hedge your 45 DTE portfolio, then add that DTE hedge. Maybe you have 60 DTE holdings and swing trades. But your swing/active trades are all-or-nothing and you just want to hedge your long term portfolio which is 300 delta. Then add 300 negative delta at 60 DTE.
Tom King: Buying SPY protective puts (either single puts or debit spreads) is the easiest way. But you can also add negative delta in many other ways. Buying UVXY can also be a way to hedge your portfolio.
Igor: The worst possible that can happen is buying far OTM puts to hedge far OTM calls (strangle) and the market chips around to burn off premium in both.
Knowing your timeframe and what you’re protecting is key
Kushal Mehta: @igor this is amazing. Thanks a lot. I just calculated the SPY Delta of my portfolio which is expiring over the 90 days. It comes to 545.
Igor: When I buy options, I size trades giving them room to fall. This way I don’t need to worry about hedging them and if I don’t thing the stock is going to play out I can just cut it and move on.
Kushal Mehta: thats what i am thinking as well. As i have just started, the portfolio at hand is a small percentage of my capital. Hence even if it fails 100%, I can easily manage my capital. Buying puts seem to be expensive in compared to the market value of the portfolio.
Igor: @Kushal Mehta so now you know how much exposure you have. Finding a way to structure protection around it is what you need to figure out.
Kushal Mehta: @Tom King UVXY seems to be going in the opposite direction of SPY? So is this used instead of PUTS on SPY?
Tom King: It can. They are not interchangeable, you just need a plan. As Igor said, it matters WHAT you are hedging. UVXY Would be best for a long term portfolio hedge and only when it’s at lows. I may add it when SPX drops below the 20 EMA as a disaster hedge. But usually, I add a put spread. But I have longer term holdings in addition to my active trades. As Igor said, size your active trades properly so you don’t have to hedge. Hedging is best for longer term trades or portfolios.
Some links for further Information
https://www.tastytrade.com/tt/shows/options-jive/episodes/how-to-use-beta-weighted-delta-09-05-2017
https://www.reddit.com/r/options/comments/8pp3d3/beta_weighted_delta_for_short_premium_portfolio/
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