29 lines
1.2 KiB
Plaintext
29 lines
1.2 KiB
Plaintext
Mixing Exposure • 253
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When you bought the protection, the index was trading at 1,375, so
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you bought one-year puts about 5 percent OTM at $1,300. If the market
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had fallen heavily or even moderately during the first five months of the
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contract, your puts would have served you very well. However, now the
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puts are not 5 percent OTM anymore but 23 percent OTM, and it would
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take another Lehman shock for the market to make it down to your put
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strike.
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Keeping in mind that buying longer-tenor options gives you a better
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annualized cost than shorter-tenor options, you should be leery of entering
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into a hedging strategy such as the one pictured here:
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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
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Buying short-tenor puts helps in terms of providing nearer to
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ATM protection, but the cost is higher, and it gets irritating to keep
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buying expensive options and never benefiting from them (funny—
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no one ever says this about home insurance). Although there are no
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perfect solutions to this quandary, I believe the following approach
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has merit: |