|
PureBytes Links
Trading Reference Links
|
CRASH INSURANCE...
Pick an index that closely matches you portfolio ... exact is not critical ..
close is good.
Don't buy puts unless you desperately want term insurance and are willing to
under perform if the market goes up or stays flat.
Don't short futures unless you can live with disaster if the market rallies
sharply.
Sell a put back spread.
Let's say the index you choose is at a level of 1000.
Consider selling a put a little out of the money say a 975 put and then use the
proceeds to purchase 2 puts further OTM that create a debit close to what the
credit was for the 975.
Viola!
If the market goes up the insurance cost nothing(unless there was a debit in the
trade)you fully participate. If the market is unchanged you get the same
wonderful outcome.
If the market goes down a little this strategy hurts as you spread is out of the
money(in essence an insurance deductible)and the short put will hurt until the
long pouts(2) kick in. So for small moves back spreads can hurt. Generally you
are not worried about a small move and buying puts outright would not have
protected you from a small move anyway.
Big decline you are insured. The hardest part here is identifying how much risk
you are willing to assume and pricing the risk of the various hedges. The
biggest benefit of the back spread is that you don't get hurt much if you are
dead wrong and the market rallies. Image having done anything but backspreaads
to insure for the last few years. Unless you were a perfect market timer YOU
ARE ALREADY DEAD.
Earl Adamy wrote:
> Since you will continue to hold the original portfolio, you appear to be
> assuming that any decline in price will eventually be fully recovered. Given
> this assumption, hedging by shorting futures contracts should offer superior
> returns to buying puts. In buying puts you will be paying for the insurance.
> In selling futures you would be collecting the net decrease in premium which
> is roughly equivalent to a shade over the yield on tbills. This type of
> hedging can be performed for several different equity indexes, bonds,
> Nikkei, etc.
>
> Earl
>
> ----- Original Message -----
> From: <DPritch901@xxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Sent: Friday, May 21, 1999 10:45 PM
> Subject: Re: OPTN - DOW Crash Insurance
>
> > WHAT OTHER LEAP OPTION IS AVAILABLE AND TRADLABE AT A FAIR PRICE IE
> > PUTS DON
|