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Comment by tempsy | Hacker News Reader

Buy S&P puts as a hedge to save your account in times of extreme volatility.

I had 270 strike puts for April I bought on Friday for $6 that jumped to $15 today and got my account to break even even though the value of my stocks went down.

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Purchasing options is usually terrible advice for anyone who hasn't been doing this for a long time. Options are very difficult to do right. Even if your intentions are sound relative to what is occurring in the market (e.g. volatility plays today), you can still get some aspect wrong and lose a bunch of money.

My strategy is to operate with a margin account and use high/low water marks as the trigger points for adjusting leverage. For example:

I prefer to maintain my margin utilization under 40% of my overall portfolio balance. I also prefer to maintain a value/growth allocation such that my margin is usually self-funded via dividends, but I don't mind eating a little bit of fee for the long-term opportunity.

If my margin utilization falls below 40%, I will use the leverage until its right back at 40% (mandatory minimum).

If my margin utilization is at or higher than 45%, I will stop use of additional leverage (mandatory maximum).

The sweet spot for me is 40-45%. This is effectively my "options" range for market downturn. Within this range, I have granted myself authority to purchase equities based on daily market conditions. The window is narrow, but this morning I purchased a bunch of equities on margin right up until the 45% mark was hit. I obviously went for the ones in scope that were hit the hardest today.

Tomorrow, I will re-run that ruleset and act accordingly. The advantages of using margin to acquire shares is that you have the actual shares and can hold them long term. Contracts mean you get to pay taxes right away and have nothing to show for it after everything clears.

Or just buy index decade after decade... this of course does not work if you attempt to beat the index or have timespan that is short.

The index has become a bubble in of itself. It's also not as diversified as you would think when Microsoft makes up 5-6% of the S&P and over 10% of Nasdaq.

Other indexes, like the German DAX [1] have a hard cap at 10% per company.

[1] https://de.wikipedia.org/wiki/DAX

So then purchase and overweight small and mid-caps and international indexes if you think that SPY is top heavy. You don't need to deviate from index investing just because a part of the index is outperforming the rest. Choose an allocation, stick to it, rebalance when you hit some threshold.

I don’t want to buy the index?

You don't have to stick to the S&P index. There are others that follow tech, or commodities, or the Canadian stock market, green energy or what have you. You can diversify yourself.

500 of the top American companies is good enough for me. (S&P500)

What is the end game with this strategy? If you sell the puts today to capture the profits, do you also sell your equities? If you don't sell your equities isn't there a chance the slide further? If you hold the puts to maturity why buy them at all?

The end game is to save the value of my account without having to sell holdings I want to keep long term for tax reasons.

I'm up 8% for the year instead of down 15%.

Maybe you really are more clever than the rest've us, and have beat the market. Or maybe you got lucky. Or maybe we're only hearing about the winning trades, and you've got some losers we're not hearing about... I suspect it's option 2 or 3. Regardless, this is bad advice.

No he just dampens his returns by protecting against extreme downside black swan events

It isn't bad advice to hedge your position with options, although doing it short term as suggested here is an active trading strategy and inherently more risky.

Contrary to popular belief that options = gambling, this is the #1 real utility of them. If 90% of your investments are tied up in S&P 500, it makes sense to hedge that with put options which provide a clearly defined max-loss over the contract duration of the option.

So in a period like this when those put options become valuable due to price drop and general IV, you can do as suggested and sell them to re-coup losses and maintain capital. It doesn't change the lifetime performance of your money placed in the corresponding security, but it most certainly improves the performance of your portfolio as a whole and limits the damage that can be done in any given downturn.

If you only hold securities, index or otherwise, your only recourse is time. I certainly wouldn't recommend trying to time the market, just like I wouldn't buy an insurance policy the day before a loss. That doesn't mean you avoid insurance altogether because you can't predict when you'll need it.

Your puts are going to expire at some point, what after that? you sell all your holding after expiration? or you buy more puts? puts are expensive, I started 2 weeks ago and paid 7% of my portfolio in premium just as insurance.

You sell them before they expire for profit.

If the market drops less than your put strike price, you can sell the puts and keep the shares. If it drops more, you exercise the put, which results in selling the shares at the strike price.

What fraction of your account value would you have lost if those puts expired (i.e. if the market had not declined)?

Well they wouldn't have expired until 4/17, so even if the market didn't go down today or went up it wouldn't have dropped anywhere close to $0.

I hadn't checked VIX for a few weeks. As I write this, it's trading at 54.79. That's insane. It's usually in the high teens to low twenties.

Just have to be aware of vega in these market conditions though, with the VIX as high as it currently is options premiums are through the roof and if there is some breakthrough in a vaccine/resolution to the oil price war the IV crush can bite hard (learned that the hard way).

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