I did this morning what I should have done months ago. I bought puts for downside protection. It’s not like many of you haven’t advised it during the past 18 months of my blog’s life. Finally, down big already, I wised up (a little). I started off this morning looking at individual stocks to buy protection, but the dive was so quick that I felt I was missing the mark of where it’d be worth buying protection. I thought that for the past few weeks and was clearly wrong, but I’m trying here. So, I moved to ETFs to try to buy protection in an indirect hedge. SPY made the most sense to me after I charted it this weekend and saw that it could have a 9% drop in it before it leveled, if not worse of course. It was already down a few percent, but I jumped in anyway.
While SPY (S&P 500 Index ETF) was trading at $106.90, I bought two XPY December 110 puts (SPYXF) at $9.15 and paid $1841.99 with commissions. The farther out time horizon for the options’ expiration will slow time value from beating me too soon and I sold a little in the money to give me some intrinsic value if SPY turns flat I won’t lose it all. If it comes back strong, I’ll make more on my individual stocks.
I then went to XLB (Materials Select Sector SPDR Fund) while it was trading at $28.42 and bought four XLB November 32.00 puts (XLBWF) at $4.50 and paid $1,812.99 with commissions. Again, I went in the money and past the front month options. XLB isn’t trading December options yet or I would have tried it there. Implied volatility was high on both of these with the fear running rampant in this morning’s session, so I overpaid, but “overpaid” could become a bargain if stocks continue to fall.
I had my biggest loss of the morning on the DRYS shares I already own and decided to stop the bleeding there directly. I screwed up my order like I haven’t done in seven to eight years. I meant to buy puts in the money, but sold them. I doubled my risk instead of cutting it. While DRYS was trading at $24.86 I sold two DRYS November 35 puts (DQRWG) for $12.00 and received $2,388.49. I turned around to note my trade for this post and saw a credit instead of a debit. I nearly screamed I was so pissed at my mistake. I turned around and bought it back for $12.50 and paid $2,511.49 as it dropped a little in the 2 minutes in between. I could have waited and gotten back to even or better, but decided the risk of waiting wasn’t worth the $120 quick loss I ended up taking.
I continue to think we’ve seen the capitulation we need to bottom, but I’m waking up late to realize that day might be farther down the road still. I’ve learned a lot through this bear market and will try not to make the same mistakes next time around. The question I continue to ask myself is how much insurance should I buy at this point. I have a little now and will probably buy more on the next short rally.
I’m no longer having fun with this. Are you? Let me know if any/most of you were hedged properly when this bear hit.
Hang in their!!! I read your blog almost every trading day of the week and have it “RSS” into myyahoo account at the top of the list. I personally use the “Married Put” strategy and I’m about 75% invested right now. My account is down about 5% for the year and all my stock positions are down over 40% from where I entered. As you know this strategy protects too the downside if things just go bad like it is now. I especially like the idea of determining how much risk I want too take in a “Married Put” trade before I enter it and by keeping the Long put option in place, helps too keep my emotions in check. I have in place covered calls on my “Married Put” trades too help reduce the “small” losses I have. The “Married Put” strategy is my “PLan A” for investing my money and what really keeps me coming back too read your daily postings is how we both have the same strategy which I call my “Plan B” for investing and that is adding on a monthly basis a fixed amount of $$$ into our trading account. Keep up the daily posting…….and stay hedged…..Warren
Buying puts when IV is sky high is tricky.
I’d recommend going for the least expensive puts – and that means the near-term (not the further OTM). Yes, time decay is RAPID, but they have much less vega . If (big if) IV drops, you will be happy you did not buy further out puts (such as those DECs you bought).
Good luck here.
I was lucky. The strategy I recommend in my book paid off in spades. I owned extra strangles against the iron condors I bought.
I had a chance to sell these for around $800 profit earlier today, but got called in a meeting at 3:00 and didn’t get to see the turn back up for the indexes. I’m up on SPX and down on XLB. I’ll probably hold these a few more days to see if I lose on them or can do OK. The high IV has kept me from buying puts lately. Once I got behind I didn’t want to spend the money to catch up. Hopefully I waited too long and the markets will recover now. I won’t mind losing $3600 on these if my other stocks/options bring me more.
I’d sell 1 Put on SDS before buying 2 expensive Puts on SPY. If assigned you have a hedge that costs half as much an equivalent SPY short that you can sell covered calls on. I posted this 8/18/08 on another board:
I pulled historical prices of Dow Jones Industrial Average (^DJI) back to 10/1/1928 from Yahoo into a spreadsheet and found some interesting numbers. Basically says that timing does matter and being “Long Only” misses a lot of opportunity, IMHO.
Days:
——————————-
Up 10,426 (52%)
Down 9,631 (48%)
Total 20,057 (100%)
Points:
——————————-
Up 174,111 (51.7%)
Down 162,451 (48.3%)
Total: 336,563 (100%)
Diff: 11,660 (3.5%)
Thanks for the numbers Mule. I don’t even think you have to switch directions that often. A bear market catches most of the down days and the bull catches most of the up days obviously. That could even allow you to stay in one position for months at a time, if not longer.
Also, I added the UltraShort S&P 500 ProShares (SDS) to my Option Ideas page (http://mytradersjournal.com/stock-options/stock-and-option-trade-ideas/). Your theory is this? – Instead of buying a put because I think SPY could go down, instead I should sell a put on the inverse because SDS should go up? If SDS goes down, I’m making money on my other positions. I’ll have to consider it. It’s a limited hedge due to limited profit though.