SPY / Equity long hedging stategies?

[apsoccermd]

Hello, 

 

I am looking for some feedback on with hedging long equity exposure..  Buying outright index SPY/SPX puts have been a loosing proposition this bull market.. I have been playing  with put spreads  such as  SPY put  butterflies, but having difficulties with structuring these hedges in terms of duration and prices..

 

Does anyone have good experience about structuring a good hedging option strategy they can share, that doesn't bleed great deal of money and protects against equities downside?

 

Any information on this subject is highly appreciated.. 

 

Thanks

[Kim]

You might consider looking at out Anchor trades service.

[Christof+]

 

Let's dissect what you aim at: you are searching for downside protection while at the same time you would not want to give up any upside potential, right? Options are perfect for constructing basically any non-linear payoff which would serve your purpose. But whatever position you set up, whatever the tweak is which you will do, you will not get around one basic truth: you are looking for a convex payoff with positive gamma (i.e., a payoff which is 'bent to the left'), giving you an 'optionality in your favour'. And this optionality  will always cost you money (i.e., position will experience theta decay). It is the basic nature of options (and at the core of arbitrage-free markets). You can try, twist and tweak but in the end it will always boil down to this very 'law of nature'. As you write yourself, its cost can be quite substantial over time.

 

But this 'over time' may be also giving you kind of a way out: If you manage to take on the position only 'in times when you need it', you could considerably reduce costs (in fact, take instruments with linear payoff and have no theta loss at all, like futures). So how to manage the switch-on/switch-off? Exact market timing might be a little hard (many would argue: simply impossible), you can lend from quite a number of Tactical Asset Allocation (TAA) models which basically try to implement that switching mechanism over a range of asset classes. One class of those models are momentum based models, they are very simple in most cases and have proven useful over decades (one recently famous example is Gary Antonacci's Dual Momentum approach which does have beauty, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042750, there are writeups everywhere on the net). If you have to hold on to a larger equity junk, using the equity part of such a model, or taking the full model as overlay will not completely save you from all drawdowns but will improve your performance dramatically over longer periods (and that with app. 1-2 hours of work per month).

 

 

Edited September 23, 2017 by Christof+