Hedge update 4

Just to recap I am currently short a total of 400 S&P500 November 20,2020 360 calls and long the 270 puts for the same day. My current credit is $1.43 per contract for a total collection of $57,200 (1.43x100X400) This is a hedge against my long term portfolio holdings. The market MAY just go higher. It sure seems like it wants to shrug everything off right now.

The position only goes up in value if the market pulls back like 10% of more. My risk is if we get over SPY 360. I thought that was a very low risk at the time I put that hedge on and still think it’s a bit of a stretch, but boy it can feel uncomfortable. TOS is showing this position pricing about $3.07 so am down $65600 (-1.64x100x400) minus the original collection. So I am currently down around $65K in this hedge.

The math says that my statistical chance of 360 being in the money on Nov 20th is about %37. It was only about 6% when I first wrote this position.

This is the uncomfortable side of trading. I have committed enough capital to this hedge. I have no more plans on adding to the position. It’s a hedge. Let it protect my long term portfolio

Managing a hedge

So I put this hedge that I posted on earlier http://www.futuresradiolive.com/2020/02/10/possible-hedge/

To make this simple. I am going use a 10 option position to show how this worked and how I am managing the position

Sell 10 Mar 20 SPY 340 calls for $3.22 each. So you collect $3220. for that position.

10 x $3.22 x 100 =$3220.00

You use that money to BUT the SPY 318 put for the same day expiration Mar 20. Those cost $3.18 so you pay out $3180.00

10 x $3.18 x 100 = $3180.00

You netted $40 to put on a free hedge for market downside protection.. Your risk is if the S&P500 goes above 3400 by March 20th. You do tie up about $6,000 in margin with Interactive Brokers for each short call. You reward is unlimited via the long puts if the market really sells off.

The market was up around 3360 when I wrote this post and entered this position.

Now the market has been selling off. The DOW was down 1000 handles yesterday.

So I covered 1/2 that long put position yesterday. Again, for this math we will use 10 options.

Sell 5 of the long puts for $4.40 each. You collect $2200 for that sale.

5 X $4.444 x 100 = $2200

This is still let long 5 puts and so far you are up $2240 with this hedge. Remember you are net $40 when you started.

Use that money to by cheap out of the money calls above your short call SPY calls of 340. . For this example I will use the 352s Which were purchased at .04 or $40.00 This frees up most of the margin that was tied up on the original sell.

Buy 10 Mar 20 SPY 352 10 x $.04 x 100 = $40.00

The market “might” bounce. So using the remaining 5 puts. Sell high strike puts against those to turn those into a credit vertical to collect premium.

Sell 2 319 SPY Mar 20 puts for $4.89 and collect $978.00 This is a trade with a net MINIMUM profit of $778.00 The risk is the distance between the short and long strikes which is $1.00 or $100.

2 x $4.89 x 100 = $978.00

Buy in the short SPY MAR 340 calls above to .01 or $4 and release all of the margin. You can resell those later if the market makes a move higher. You still have 10 352 Mar 20 calls that you could sell calls against.

So now you have two, cannot lose put spreads short 319/long 318 for March 20 you still have three long puts at 318 which you purchased for free. So those will go up much higher if the market continues to sell off.

You have made $2200.00 with this trade. You have another, at least, $778.00 that you collect and maybe the full $978 if the market gets a bounce. You still have protection to the downside.