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Comment by tempsy | Hacker News Reader

I have been holding S&P puts as a hedge since the S&P was at 3330, and my portfolio value is at the same level as it was near early Feb highs because of them even though my stock holdings are down.

The idea that you should just sit back and be ok with a 20% haircut isn’t something that I will just “take” if I can help it.

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You are waving around a winning lottery ticket as evidence of your strategy being better. What is your strategy? First of all, was this put even good? How much of your portfolio did you cover and how much as a fraction did it cost? But much more importantly, how many times have you hedged your portfolio in the last eleven years?

Hedges cost money. Market goes up long term. You will lose money long-term by hedging. That's the steady state of your strategy. That's the obvious reason why people don't hedge. I'm puzzled as to why you didn't acknowledge this. Instead, you offer an outlier where hedging performed better. Seems deeply disingenuous.

You don't have to do it constantly, and it would only lower your gains, not cause you to lose money unless you're over insuring.

All-time highs, inflated money supply, dropping interest rates, trade wars, overbought stocks, overloaded repo markets, bond yield inflection, and more signs over the last few months are a pretty clear signal to engage in hedging.

I agree with that but do you know you’re going to take a 20% hair cut? What if you get out of the market after it drops 6% at the bell tomorrow and then it goes up 1% the day after and 3% the day after that? Do you panic buy back in? What happens if someone finds out that a cheap readily available drug cures it and this whole thing is over in three weeks?

I’m extremely pessimistic about the market right now, but I’m more pessimistic that if I traded that I wouldn’t lose more money.

I’ve had a big chunk of my 401k sitting on the sidelines for months now. I’m going to wait to see how this virus thing shakes out then use it to buy back in after it looks like the worst is over.

Until then, there’s way too much uncertainty to try and trade this. I’m not retiring for twenty years. Whatever happens it should bounce back in 2-3 years or so.

Well of course I can’t predict the future but we kept hitting all time highs even well into the coronavirus outbreak in early Feb and it didn’t make sense to me. I didn’t think the rally had any more legs to it and bought puts to hedge. As the market kept going down I kept or trimmed the options.

The point of using options is that I’m still holding a lot of my stock, so if it bounces back up then it’s just my options that lose value.

The market is (or at least has been, cue zombie apocalypse or Japan) almost always hitting or near all time highs.

Literally over 5% of days are all time highs. A full third of days are within 5% of the as-of-yet all time high.

Ray Dalio gave an interview a couple of days ago in which he predicted insolvency for some sellers of just such far-out-of-the-money puts. Any ideas who these might be, beside hedge funds? In particular, anyone systemically important e.g. shadow banks ...

Congrats on winning the lottery.

Long term yours is a losing strategy.

Here’s some actual analysis of rolling puts as a hedge: https://movement.capital/the-true-cost-of-hedging-sp-downsid...

Insurance through options is not a losing strategy. They are designed for hedging, and some basic attention to trends (all-time highs and coronavirus) can provide nice gains or protection from losses.

What you are referring to is “timing the market”, which is a strategy I suppose. Just not one a lot of investors consider valid.

Yea, because people interpret it as extremes.

Anytime in the last quarter with constant news about all time highs, record low interest rates, overbought stocks with extreme ratios, and a global pandemic affecting supply chains was enough to try and allocate some attention towards a downturn with cheap bets or portfolio protection. 1-5% on puts is well within standard risk management.

You don't need to be a daytrader or prophet for any of this. If you missed the drop and positions have lost value then sell covered calls for income. Then wait it out because we have an entire summer of disrupted global trade coming. Don't think about buying in until that's over.

I use options as a hedge not a bet like some people. These hedges are short term tools.

Options have a cost and by using them, you are timing the market.

I didn’t say I wasn’t.

I don’t subscribe to generic investment advice. Options are insurance when things are wacky. The coronavirus has concerned me since January and I hedged accordingly.

More like crashing you car and getting it fixed under insurance sorts out that rust spot!

Buying SPY puts when vol is at historic lows is not unreasonable.

vol is at historic highs. literally double previous highs, last week.

OP mentioned he purchased puts when S&P was at 3330.

price is not the same thing as trading volume.

Vol = volatility, not volume.

What’s the point? Instead of spending money on stocks and puts against the same stocks (which costs money), why not just allocate less to stocks in the first place?

The reasons I could imagine is if the stock is illiquid (401k, lockup, etc)

I’ve sold some stock earlier this month but not everything. I don’t want to sell some that I’ve been holding for a long time for tax reasons.

OP might not want to lose his positions I guess.

Taxes on reallocating

I bought S&P puts at the wrong time so many times that I just gave up, didn't trust my gut in early Feb, assumed the market would find some strange way to keep going up. Oops.

>The idea that you should just sit back and be ok with a 20% haircut isn’t something that I will just “take” if I can help it.

You don't have to be an active trader to preserve your capital. I've been invested for years but around the 2nd week of Feb, I went 100% cash. This time I saw train and got off the tracks. My plan is to average in slowly over time as the market stabilizes and the news gets better.

It's a smart move. What's price of the put BTW? Did you feel that people were concerned about an immediate fall that Put was expensive at that moment?

I’ve bought and sold at different strikes and late March/April expirations for last 2 weeks. At end of Friday I entered $270p for 4/17 at around $6 or so.

Me too. I bought 10 contracts on SPY puts 5 days before the drop, expiring January. My first target is the Dec 2018 lows but I expect a 50% drop before the end of the year.

I love how people are self righteous about the timing but I have been wildly profitable over the last 20 years picking my spots like this.

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