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