Reducing Deltas

[Edwin 63]

If I want to reduce deltas on a long portfolio, what are the best strategies to help hedge against the possibility of the market going back down?  Short calls spreads, naked calls, long puts on SPY/SPX, shorting SPY shares, selling /ES futures, or other index products (Nasdaq, Russel, Dow, etc.)  Anything else?

[luxmon 228]

If the term structure is favorable, index bear calendar spreads are a good option for grinding declines, but don't work as well for crash scenarios like Monday.  Owning some OTM puts are your best option.  You can finance them by selling nearer term put spreads.

[Edwin 63]

Thanks for the suggestion. I think I'm leaning a bit more towards call credit spreads, since I want the theta decay and IV compression on my side.  I guess I would have a higher probability of profit if the market happens to go sideways.  We'll see how it goes.

[TDM 33]

I think it depends on several factors, including what you mean by "hedge," or more specifically, how many deltas you want to reduce. If you want to truly hedge a long portfolio, subscribe to Anchor Trades and read up on Chris's methedology. It can be readily overlayed over any long stock portfolio, not just the ETF one that is the "official" portfolio.

 

On the other end of the spectrum, I've had some good luck selling covered calls on individual stock (or ETF) positions. If the market goes up a little, sideways, or crashes, you keep a reasonable amount of premium which will take the edge off the crash. 

 

The only problem I have with Credit Spreads is that they can get pretty expensive if we have a recovery. The October 205/210 SPY Credit spread is about 1.50- in my opinion, that's not much protection relative to a cost of 3.50 if the markets recover in the next 6 weeks.

 

The other big factor I see is whether you are trying to hedge against a "crash" or a "slow burn." If you're looking at a crash, OTM puts are probably your best way to go, but you could also consider a straight volatility play, since we can expect an IV spike if the markets drop another 5-10%. If you're looking at a "slow burn," you may want to consider something like the delta negative butterflies we currently have on. I actually loaded up on some extras of those (complete with the call hedge) specifically for the negative deltas. I figure if the market grinds down in the next several weeks, I will make a tidy profit (30-50% depending on how long it takes), which will take the edge off the drop.

 

Just some food for thought. I'm looking forward to hearing from other's as well as there are always better ways to do it. I will have to check out the bear calendar spreads.

[Edwin 63]

Thanks for the feedback.  Another possible strategy would be cashless collars (covered call & long OTM put) against my long positions.

[PaulCao 51]

Hi, 

 

Echoing the comment earlier, it all depends on low you think the market is going to go, whether orderly or going to have the same kind of free-fall we had earlier this Monday, 

 

If think going to be taken down orderly, then sell call spreads if the market is going to down steadily, 

 

If going to crash, then probably have to pay the premium for the puts, 

 

My personal opinion (which is honestly more likely to be based on sheep-herd mentality and incorrect) is that the market is going to dip in an orderly fashion; but my opinion is very biased as I'm following TastyTrade where the pundits there (e.g., Tim Knight, Tom Sosnoff) are bears. 

 

So I'd be more inclined to sell call spreads too a this point with vol relatively high, 

 

But let's suppose if SPX dips down below Monday's level say, below 1880-1900ish; and I don't want to sell calls again because the market is in what punditry's "oversold territory," I'd look to see how far I can go out on a broken wing butterfly biased on the down-side, 

 

Best,

PC