Finding a suitable Portfolio hedge for the Hawking portfolio is a little difficult this month with the heavy bias towards International equities, particularly China. However, I’ve chosen to stick with an SPX (US equity) hedge since it has extremely liquid Options and offers plenty of flexibility for adjustment with numerous strike prices available. I could possibly have used ASHR as the hedge (calculating portfolio beta relative to ASHR rather than SPX) since there is significant interest in those Options, however, I have decided to stick with SPX.
I shall be legging into this position and have started with the purchase of 5 x 2080/2060 ($20 wide) Vertical Put Spreads, expiring May 31, for $4.00 per contract ($2,000 total cost):
At the present time this position has a maximum profit of $8,000 with SPX below 2060 at expiration and a maximum loss of $2,000 with SPX above 2080. In the next few days I shall be looking to hedge this position off either by selling Call spreads with a move up in the market or selling Put Spreads with a move down. The objective will be to create a position that benefits from time decay (has positive theta) rather than the current position that loses money through the passage of time. The other objective will be to adjust the risk (currently high probability (~60%) of $2,000 loss) to a situation where we have a lower probability (<30%) of loss, even if the risk level may be a little higher.
I will update this Post as I adjust the position.
Update: May 06, 2015,
I have adjusted my original position by selling a 2030/2010 Vertical Put Spread for $4.00 per contract (total $2,000 credit) to convert my hedge position to a Put Condor Spread. My net cost (excluding commissions) on this position is zero and I have zero risk. Maximum profit is $10,000 with SPX beteen 2030 and 2060 at expiration.
I am now in a position with net positive theta that will benefit from time decay.
Update: May 12, 2015
Today I adjusted my hedge position by selling 10 contracts of the 2130/2135 Vertical Call Spread for $1.50 ($1,500 Credit).
Update: May 19, 2015
I’ve adjusted my hedge position by a) rolling out my 2130/2135 Call spread to the 2140/2145 strikes. This cost me 0.75 per contract or $750 on 10 contracts and b) adjusting the Put Options by selling 5 x 2010/2030/2040/2080 unbalanced Condor spreads for 2.00 per contract ($1,000 credit). This now leaves me with a reasonably wide unbalanced Condor with a maximum profit of $1,750 if SPX closes between 2060 and 2140 at expiration. I’ve introduced significantly more risk than I had at the beginning but time is now working for me and I still have room for more adjustments if necessary. We need to remember that this was a downside hedge and SPX is significantly higher than when the hedge was originally opened.