254  •   The Intelligent Option Investor
S&P 500
1,800
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
8/1/20129/1/201210/1/201211/1/201212/1/20121/1/20132/1/20133/1/20134/1/20135/1/20136/1/20137/1/2013
GREEN GREENLIGHT GREEN
LIGHT GREEN
LIGHT GREEN
Here I bought fewer long-term put contracts at the outset and then add-
ed put contracts at higher strikes opportunistically as time passed. I have left 
myself somewhat more exposed at certain times, and my protection doesn’t all 
pick up at a single strike price, so the insurance coverage is spotty, but I have 
likely reduced my hedging cost a great deal while still having a potential source 
of investible cash on hand in the form of options with time value on them.
The Unhappy Case of a Successful Hedge
Markets are down across the board. Y our brokerage screen is awash in red. 
The only bright spot is the two or three lines of your screen showing your 
S&P 500 puts, which are strongly positive. Y ou bought your protection 
when the market was going up, so it was very cheap to purchase. Now, with 
the market in a terror, the implied volatilities have shot up, and you are sit-
ting on a huge positive unrealized value.
Now what?
The psychological urge to keep that hedge on will be strong. Such a po-
sition is safe after all, and with the rest of the world falling apart, it feels nice to 
have somewhere safe to go. What should you do with this unrealized profit?