Portfolio Hedging Review

In the past, I’ve written about how I buy puts on the SPY index to hedge my portfolio. Since I started doing so opportunistically about 3 years ago, I’ve found this to be rather ineffective. This could be because the markets have on the whole been on a huge upward move, with hardly any corrections. However, I do feel some dissatisfaction at wasting money on puts that almost always expires worthless.

Since November, I’ve switched to using the E-mini S&P500 futures contract instead. I’ve done a total of 6 round trip transactions. The benefits of using options was that your downside is capped at the original amount of premium you paid. The benefits of using futures on the other hand is that there’s no money spend on implied volatility, or a theoretical premium to what the protection is worth. The flipside is that you have to actively manage the position. In many ways, you are selling short futures because you think the market is going to fall, but you find it difficult to sell your stock posiitons because, for example, they are undervalued.

When calculating my performance, I’ve once against lost a bunch of money on this new tool. On closer examination, I believe I have lost less this way, than if I was to use SPY puts. I believe there are a few reasons to this. Firstly, you don’t lose time value while holding the position. Secondly, the leverage that the futures provide means that I usually only have an open posiiton of 1 contract. The leverage allows me to have a smaller position. Hence, I plan to continue to use this as a tool instead of options.


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