rijk Posted October 24, 2011 Share Posted October 24, 2011 paying for the otherwise excessive option insurance costs by over-insuring and selling short term puts against long term calls (or puts) seems like an interesting idea -does anyone use this strategy? what are your experiences? -the viability of this strategy is based on the premise that option pricing places more value on something that is close than way in the future, if this is a fire-proof strategy, then why not forget about long equity investing and make long/short (maturity) option trading your main activity? regards rijk http://seekingalpha.com/article/294438-hedging-with-options-using-spy-as-an-example Link to comment Share on other sites More sharing options...
ageofsocrates Posted October 24, 2011 Share Posted October 24, 2011 Its a good idea...but issue is that if market does not crash, u lose the premium...Personally, i would use gold as a form of insurance. More liquid and you can keep it till the next crisis occurs.. Link to comment Share on other sites More sharing options...
rijk Posted October 24, 2011 Author Share Posted October 24, 2011 please read the articles, the interesting part about this strategy is that insurance costs are offset with premiums earned from selling covered puts on a weekly basis..... not really interested in gold..... regards rijk Link to comment Share on other sites More sharing options...
Uccmal Posted October 24, 2011 Share Posted October 24, 2011 Why dont you set up a spreadsheet and see it would have worked over the past year. I wouldn't bother personally - I have no trouble buying when the markets have tanked and selling into rallies. I also have no problems taking up to 20 percent hits - above that and i get jumpy. Problems I see: taxes with all this trading. One cannot report your losses due to wash rules, but you have to report your gains. Option trades are expensive - factor in 70 x 52 intrading costs. A huge amount of effort, discipline, and maintenance required. If one cannot buy into a plunging market and sell into a rally, where is one going to find the discipline to stick tightly to the outlined program. Link to comment Share on other sites More sharing options...
rijk Posted October 24, 2011 Author Share Posted October 24, 2011 i have little doubt that the hedge piece of the strategy will work fine... the trickier piece will be to recover the insurance costs by selling weekly puts, which i think is more difficult to simulate in a spreadsheet tax implications and trading costs are good observations.... as the author mentions in the articles, you can fine/tune this strategy endlessly, making it high maintenance/time consuming, however, the strategy itself doesn't need that much attention/maintenance, once the annual short/call or put is in place, you only need to repeat one transaction, selling the weekly puts, once a week, this shouldn't take more than 15 mins/week regards rijk Link to comment Share on other sites More sharing options...
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