37 lines
2.1 KiB
Plaintext
37 lines
2.1 KiB
Plaintext
Mixing Exposure • 251
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Equivalent
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AAPL Strike ($) Deductible ($) Annual Premium ($)
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Total Liability to Home
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Owner ($)
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450 2,795 64,500 67,295
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405 52,516 32,500 85,016
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360 102,236 13,500 115,736
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I know that I would not be insuring my house at these rates and under
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those conditions! In light of these prices, the first thing you must consider
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is whether protecting a particular asset from unrealized price declines is
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worth the huge realized losses you must take to buy put premium. Buying
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ATM put protection on AAPL is setting up a 12.9 percent hurdle rate that
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the stock must surpass in one year just for you to start making a profit on
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the position, and 13 percent per year is quite a hurdle rate!
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If there is some reason why you believe that you need to pay for insurance,
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a better option—cheaper from a realized loss perspective—would be to sell
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the shares and use part of the proceeds to buy call options as an option-based
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replacement for the stock position. This approach has a few benefits:
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1. The risk-reward profile is exactly the same between the two
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structures.
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2. Any ATM or ITM call will be more lightly levered than any OTM
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put, meaning a lower realized loss on initiation.
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3. For dividend-paying stocks, call owners do not have the right to
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receive dividends, but the amount of the projected dividend is de-
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ducted from the premium (as part of the drift calculation shown
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in the section on covered calls). As such, although not being paid
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dividends over time, you are getting what amounts to a one-time
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upfront dividend payment.
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4. If you do not like the thought of leverage in your portfolio, you can
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self-margin the position (i.e., keep enough cash in reserve such that
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you are not “borrowing” any money through the call purchase).
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I do not hedge individual positions, but I do like the ITM call op-
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tion as an alternative for people who feel the need to do so. For hedg-
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ing of a general portfolio, rather than hedging of a particular holding in
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a portfolio, options on sector or index exchange-traded funds (ETFs) are
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more reasonably priced. Here are the ask prices for put options on the SPX |