In the past I have used Options to Hedge my Hawking Portfolio. However, over the past 6 months I have not used these hedges – partially because I have been in the process of changing my investment strategies and have not been heavily invested, and partially because I have not felt the need for insurance with markets plodding slowly upward. However, with the lazy hazy days of summer upon us, I am getting a little more nervous and have decided to look for a portfolio hedge.
This month I am going to prepare for a possible modest 2% decline in “market” value. Therefore, based on a nominal $100,000 portfolio I am looking to insure against a $2,000 decline in the value of this portfolio.
I have therefore elected to add a “Risk Reversal” position to the portfolio:
A “Risk Reversal” is simply the purchase of a vertical Put Spread (buy 2380/2400 Put spread) financed through the sale of a vertical Call Spread (sell 2460/2475 Call spread). The above position was acquired for a small net credit of $15. Maximum profit on this position is ~$2,000 with SPX closing below $2,380 (~1.85% below current price) at expiration on August 18th. Maximum risk is ~$1,500 with SPX closing above $2,475 – of course, these losses would (hopefully) be offset by gains within the portfolio holdings.
This post will be updated should I consider it necessary to make adjustments between now and Options expiration in August.