Although I don’t often use Options to hedge the Rutherford portfolio I have decided to add a short-term hedge as an example of how an “active” trader/investor might try to protect a portfolio and, at the same time, possibly generate a little income.
This morning I sold a short term bearish diagonal Call spread in SPX that is itself hedged to the upside through the purchase of extra Out-of-The-Money (OTM) Call Options. The Options sold expire on Friday of this week (July 14) with the Options purchased expiring July 17th. The position PnL looks like this:
i.e. I have sold 2 SPX Call Options at the 2420 strike expiring on 14 July and purchased 5 SPX Calls at the 2425 strike expiring on 17 July. The position was placed as a single trade for a $1,260 credit. This position is slightly bearish with a negative ~16 Delta but, should price move up quickly this will quickly change due to the extra long positions. Theta is positive at current prices and below so time decay will be working for us. Also, with volatility currently being low any increase in volatility will help us (positive position Vega). The position loses should prices continue to move up slowly over the next 5 days.
Maximum profit on the position is ~$1.250 and predicted maximum loss ~$1,000 with SPX closing at ~2440 on Friday.
This position could be adjusted but, irrespective of whether I choose to do this, the position will be closed out before expiration.
Update: 12 July, 2017
With a bullish market reaction to Janet Yellen’s remarks on the economy and a drop in volatility as uncertainty wanes, this hedge position is not looking too good. I have therefore adjusted the position by selling 5 Calls expiring on 14th at the 2445 strike (where we might see resistance) and purchasing 2 Calls expiring on 17th at the 2460 strike for net credit of $1,850. The new position looks as follows:
I am now relying on time decay to reverse the current ~$900 losses. The good news is that the portfolio is currently up ~$800 today after a good day yesterday.
I will update this post again as appropriate.