Retirement & Savings Accounts
Assets & Trading Systems/Locations
Market Environment
Infinity Software
Hedging
Portfolio Longevity
Asset Correlations
2 of 3

Hedging – Deep Dive Summary

A Practical Application to Hedging with Puts

If you are purchasing puts to hedge your portfolio, think of it as an insurance policy. It should not matter if you make or lose money on the put as you are looking to minimize drawdown on a portfolio and overall risk. Take 5% of perceived drawdown on an account (20% drawdown potential on 100k portfolio would be 20k) making 5% 1k to purchase puts. Go 200-300 days out and look to roll after 3-6 months days leaving a large amount of extrinsic value.

The reason a small amount of capital can ensure an extensive portfolio is due to the raming effect of Delta. When you purchase and consider the 50 or 25 delta put options, these will increase delta and increase in value in the event they become more in-the-money as the market falls. 

Watch the video for an extensive example walkthrough with Sean.

Offsets and What They Are

Offsets are positions that have a low or inverse correlation. Having a mixed basket of items that are not all tied together will limit portfolio risk. A properly diversified portfolio is in lower correlated underlying. If you are all in tech stocks you are not diversified and likely to experience a large drawdown if the tech sector underperforms and corrects.

MRCI Online is a useful website that shows correlations between various underlying. This can be beneficial when looking to balance a portfolio or hedge. While these correlations are in futures it can be useful to look at the indexes and various asset classes when constructing equity and option portfolios as well.  (https://www.mrci.com/special/correl.php)

Exchange-Traded Funds

ETFs are baskets of underlyings often matching an index that could be the 500 largest stocks in the US or a specific sector, market cap, or asset class. Many inverses or low correlation ETFs are available. Through this ETF Screen, we can look at the correlation between various ETFs and can trade shares and options.  (https://www.etfscreen.com/correlation.php)

Watch the video for an extensive example walkthrough with Sean.

Looking at the Portfolio

When the market turns you can be looking at approximately 30-35% drawdowns. We are currently experiencing a 20% fall from the peak and there is potential for a greater drop. There are many things you can trade that aren’t stock right now from Bonds, Real estate, Metals, and Commodities. 

To look at portfolio construction you can use this TD Ameritrade resource where you input your positions and size and it will export analysis of the asset classes, exposures, and breakdowns of the portfolio as a whole. The way to properly diversify is to not be in highly correlated underlying or if so having some put protection on such a sector. (https://www.tdameritrade.com/education/tools-and-calculators/morningstar-instant-xray.html)