I have just opened a new portfolio hedge for downside protection of the Hawking Portfolio. The new hedge expires in ~9 days on October 25 and again uses weekly SPX (S&P 500 Index) Options. As regular readers will know I have recently changed to using short-term hedges in preference to the longer term (3-month) hedges that I was using for the first 6 months following inception of the portfolio. Since it seems to be easier to follow price movement on a weekly rather than (multi-) monthly basis and allows me to take advantage of higher premiums (due to high volatility) when selling options, these short-term hedges have been more successful than the original longer-term hedges. However, they do require far more attention and maintenance.
The new hedge is another Risk Reversal (Long Put Vertical financed by the sale of a Short Call Vertical) that was placed for a $500 credit. The profit/loss on this position is shown in the figure below:
Maximum profit on this position is $10,500 with SPX closing below 1810 at expiration. Maximum loss is $9,500 with SPX above 1910.
October 17 Position adjustment:
Maximum profit is $2,625 with SPX closing between 1790 and 1890 on Friday (October 24) and maximum loss is reduced slightly to $7,375 with SPX above 1910 or below 1770. This is still a lot of risk so there may be more adjustments to come.
October 22: “Vertical Roll” of the Call Spread:
October 23: Roll to October 31:
Today I sold a 1975/1985 Call Spread expiring October 31 to complete the “roll” of the Risk Reversal hedge “up and out” to next week’s expiry date. This reduces risk slightly although the position is presently showing a $6,000 loss. A risk reversal would normally comprise to purchase of a Put Spread offset by the sale of a Call Spread – however, the current position comprises 2 Call spreads – A short Call Spread and a Long Put Spread at the same strikes (1920/1930) are exactly the same in terms of profit/loss characteristics, so it doesn’t matter which we use – since the Call Spread was a “roll-over” from last week’s position due to the market rally that is why the new position is composed from 2 Call Spreads.
The new position is shown below: