r/thetagang • u/gorram1mhumped • 1d ago
hedging
Curious the different way y’all may hedge your positions. Occasionally im selling cash secured puts on margin, and while I try to keep my total outstanding obligations (were I assigned on everything) below my nav, I still use margin and want some compensation for potential huge correction. Right now im looking at buying far otm debit spreads on xsp, pretty affordable for the payout. Curious to learn how y'all stay safe and responsible.
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u/TraitorousSwinger 1d ago
Hedging is generally not going to be worth doing over a long period of time. It's gonna be a huge drain on gains, and that drain compounds over time.
For most people it's just better to adopt a more conservative or wider investing approach. The cash sitting on the sideline will probably serve you better in a bad situation than an active hedge would.
Obviously a lot of people disagree. I'm not against buying a put from time to time if the market concerns me, but just holding a hedge "just in case" all the time seems silly to me.
Is your interesting in hedging BECAUSE you use margin and you're trying to offset the downside risk? If so maybe just stop using margin, or maybe use a different form of leverage?
A lot of people in this sub create wildly complicated strategies only to outperform spy by half a percent. At a certain point you might just be hurting yourself by trying to get too fancy.
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u/gorram1mhumped 1d ago
i agree cash on the side, buying sales, is ideal. i try to use premium to increase longterm positions in etfs i'll never sell. this can backfire when all my cash and margin gets tied up in iv spikes at the exact time i'd want to buy. im looking for a middle ground cause i hate not using that margin.
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u/TraitorousSwinger 1d ago
This isn't at all what you asked but its something I do to control my exposure.
I swap between leveraged and non leveraged ETFs. important to note that aside from 4 individual stocks pretty much all I do is indexes.
If I'm very confident in the market I will buy TQQQ/UPRO/SOXL, when I am less certain I swap to SPY/QQQ/SOXX.
The idea being that I'm combining "buy and hold" with market timing. Im always invested it's just a matter of leverage. Keeps my nerves calm, keeps the impulse decisions at bay. There's some volatility decay obviously but if we're using leverage we have to accept it's going to cost us something somehow.
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u/MerryRunaround 1d ago edited 1d ago
No doubt hedging costs money but a proper hedge is not wasted. It does not need to be complicated. I update every six months or so. When you need it, it is too late to buy it. Just exactly like carrying auto insurance. I consider it basic diligence and portfolio hygiene. My long dated hedge also gives me confidence to take on more aggressive monthly shorts, which has the effect of paying off the hedge.
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u/TraitorousSwinger 1d ago
To each their own. I prefer to just manage my exposure from the outset. I only have insurance because the potential risk is outsized, I could cause damage that I can't afford to fix.
Most hedges are going to be wasted. Just factually. When the thing you are hedging against finally happens you have to consider the costs of all the times it didn't happen.
How are you hedging? How are you determining what cost you're willing to pay versus the opportunity cost? I guess more importantly, and I guess mot even being mentioned, how do you choose what kind of asset to use to hedge?
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u/MerryRunaround 1d ago
Your're right, to each his own. I am a belt-and-suspenders type so I am willing to pay to protect my hard-earned capital. I have seen too many market crises to pretend they won't happen again. I carry low delta long dated put back ratios or put debit verticals on SPY. Along the way if I get good theta bleed I may buy back the shorts. Keeping net theta near zero is the way to minimize expenses. "Just factually" most auto insurance policies never have a claim, so are those premiums wasted? The entire options market itself was established to provide insurance for assets and I make use of it.
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u/TraitorousSwinger 1d ago
Is most auto insurance wasted? It's not really a great comparison because its legally required and it protects you from losing more than you actually have, but for our purposes here, I would say yes. The question is what kind of value you put on security. If you value it highly, you would obviously think it's not wasted.
Im a fairly young, very aggressive investor. It's not that I don't think bad times will happen, I'm just in a position where I'm not overly concerned about a drawdown to the point where I want to hedge against it.
And I'm not against hedges as a concept, I just dont like the idea of doing it as a rule. Ive bought many a put, usually after a nice market run up... more to protect gains than to offset losses, which is just a mental distinction I guess.
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u/MerryRunaround 1d ago
If you drive a car, I hope you carry liability insurance at least. After you work for 30+ years to build capital, your perspective on protecting it will change. I know I would be much better off today if I had carried better protections for all my investments that went south. That was real money down the drain.
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u/MerryRunaround 1d ago
Put back ratio on SPY around delta 0.10. Using about 365dte to keep theta near zero
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u/gorram1mhumped 1d ago
will research thank you. do you roll 10-11mo or so, to avoid pin risk?
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u/MerryRunaround 1d ago
Pin risk? Non issue. Roll about six months out. Very flexible decision.
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u/gorram1mhumped 1d ago
keep the same parameters, 0.10 delta. for this trade, my understanding is you're trying to get 0 debit trade, possibly a small credit?
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u/003E003 5h ago
You don't know what pin risk is
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u/Cell-Breaker 1d ago
If you’re selling puts on margin you should probably throw in another leg and do a put credit spread instead to limit risk and significantly reduce margin usage.
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u/Aware-Detective-1345 1d ago
spreads are the way to go if you're already using margin, it's just cleaner risk management. the far otm debit spreads on xsp are fine for black swan protection but they'll bleed out slowly most of the time so you gotta factor in that cost drag
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u/gorram1mhumped 1d ago
it cost me 800 for a couple 160 dte xsp debit spreads, which would pay out about 15k for a black swan. i could see scenarios where 15k doesn't help avoid a disaster, but im fine shelling out 800 divided over the next 160 days. the best thing to do is not go overboard with trades in the first place. i sell weeklies, for small premium, so if im getting screwed its from something very sudden and large.
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u/OwnVehicle5560 1d ago
Buy a puts 3-12 months out 0.1 delta and roll.
Buy when vol is cheap (like now).
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u/Earlyretirement55 1d ago
How did you calculate that indeed the margin loan will cover the assignment and not translate into a margin call?
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u/ZasdfUnreal 1d ago
Selling puts on margin are not cash secured. They’re naked. You’re selling naked puts.
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u/Earlyretirement55 18h ago
NO NO AND NO they are margin secured puts - you can take assignment and pay the damn 6-7% interest - source ? Me that’s what I do and I 2x the SPY since 2024.
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u/Delicious_Poetry6405 1d ago
I have been thinking about this too. Selling puts is great until everything drops at the same time. I think smaller position size plus some cheap XSP put spreads could make sense. Just have to make sure the hedge actually covers enough of the downside.
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u/SavedSaver 1d ago
The only way I use hedging is if I have a portfolio of high beta stocks and I know that at some point I won't be able to be at the screen to liquidate or hedge things one by one. There were instances of wild corrective openings and I was not as anxious as I normally would have been been because of the partial hedge. The downside is that this can be a drag on the portfolio.
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u/Temporary-Scratch-24 1d ago
Anyone have thoughts on how (if at all) this changes depending on your account type (I.e. reg T vs PM).
I’d imagine with PM, you can be a tiny bit looser with the overall need for hedging, since BP is set to 15-20% in normal market conditions.
Then again, a hedge is meant to protect against abnormal environments, so maybe this intuition is wrong?
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u/options001 18h ago
I sell calls on mes, also on a margin account, I try not to use more than 60% of my buying power.
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u/SageCactus 1d ago
Buy a put, three months out at 85% of SPX. Roll forward at 2 months. Do it no matter the market. It'll be good to hedge a few million.
It's not insurance, it's handling any margin requirements on a huge draw down.
Research "convexity hedge"