Hedging and buying insurance with Puts

[EV forever]

Hi Folks,

Now that many of us have been converted into Teslanaires - the question is how do we buy some insurance to maintain our Teslanaire status without selling any shares.

A long time back, I had asked this question in the main forum to the knowledgeable folks here - at the time @KarenRei had suggested to spend about 5% of the total value in buying put options and consider this as insurance. I never did that - it always seemed like Tesla puts were super expensive to purchase. Well then the COVID situation hit, and I watched helplessly as my portfolio dropped 50% along with TSLA.

Now it has recovered and far exceeded the value before the COVID crash - but this time I want to be smarter and prepare for another 'black swan event' which I feel will occur around election time. However, I do not want to sell a single long term holding share.

So what hedging strategies are possible?

1. Buy TSLA puts - I still feel they are quite expensive.
2. In the main forum, recently it was mentioned that buying put options on SPY is a good option and volatility increases simultaneously as S&P500 crashes. I don't understand this completely - so any explanations would be most welcome.

Edit: Searching through the main investor thread to tag a few members mentioning these strategies
@UnknownSoldier @Tim S @Eugene Ash @dw4ngg @mrmage @Nocturnal @pz1975

 

[FrankSG]

If you are confident about TSLA in the long run, then it's not so much hedging/buying insurance as it is a short term trade predicting a market crash. Unless you think you'll get scared and sell during a dip (although you don't seem the type imo), simply holding onto your shares long term should work out well.

Imo the only cases where a strategy like this makes sense are:

1. You see some risk that TSLA will be worth significantly less long term than it is now.
2. Circumstances do not allow you to hold TSLA for the long term, and although you see likely short term upside, you can't afford to lose a lot in the short term.
3. You believe you can predict a near term market dip, and want to make a short term trade to benefit from this.

Actually, the strategies you describe don't even make sense for the scenario #1. Constantly using a small % of your portfolio to hedge your long position over a long period of time will likely eat away at your long position too much. In this case, I think diversifying makes the most sense, and only risking what you can afford to lose.

If you are in situation #2, it depends heavily on your situation, and it's hard to give good advice without more details.

If in situation #3, the strategies you laid out can make sense, but it's pretty difficult to accurately predict when a black swan hits, to what extent a black swan affects the market, and whether TSLA and/or the market go up a ton more first or not. Maybe you're right that there's a crash in November, but maybe TSLA hits $2,000 first and the crash is down to $1,300. I don't believe I can accurately predict any of this, so I'll leave that type of advice up to others.

 

[EV forever]

Maybe I didn't explain my goal correctly in my previous post

The hedging or buying insurance would be a short term trade that goes in the other direction in a market crash. The goal would be to sell these and buy more of TSLA. So, it would be the situation 3 that you describe above.

I am not thinking of selling my TSLA shares, either because of worry of crash or attempting to time the market. This is not worth because I am horrendous at timing the market. However, I want to continue growing the number of shares in my portfolio. That means, trying to make some extra $$ via trading. Also, my life situation does not require me to sell anything at least for 15 more years.

When the market crashes - everything crashes with it. There are some few exceptions - but by and large all the stocks in my account will fall. In March, when the entire market crashed due to the pandemic worries, so did TSLA. But I had no free cash to purchase more shares. My other stocks were AAPL, COST, PYPL - all of which also dropped by over 40%. I did end up selling some AAPL to buy more TSLA at the time - but that was at a low price.

Recently, I saw a couple of posts by @UnknownSoldier that talked about using SPY puts to hedge the market. I had never considered that as an option strategy before, so was interested in learning more details. So I searched the forum and found some older posts with other folks mentioning similar strategy. See example below - this sounds interesting as a way of hedging and I would be very much interested in learning of similar strategies folks are using. The way I see it, these puts can be sold during a market crash to buy more shares of TSLA. If the market doesn't crash, I lose the money spent in buying the puts - but then the rest of my portfolio is looking good.

Small. You don't need a big hedge position to effectively hedge shares as it turns out. A wise man at WSB once told me that shares are "options that never expire, with a delta of 1". So really I took an absolutely tiny position in the lowest strike OTM SPY puts I could buy, they literally costed me $0.05 a contract, if there is a crash they will launch into orbit because of VIX spiking. I did the same thing in January.

 

[pz1975]

I personally prefer to use SPY puts rather than TSLA puts for hedging although I only rarely do this (March/April was an obvious time). TSLA options are very expensive due to high IV so it is cheaper to "insure" using SPY puts. Also, as the market falls overall, the SPY option become relatively more expensive due to increased IV so you get the double benefit of the SPY puts increasing due to the market falling + IV increasing.

 

[vikings123]

Excellent thread. I’m trying to position myself for any short term dip due to Covid19 wave 2. Like most of us on this forum my portfolio is Tesla heavy and Tesla can be volatile. Here are some of the options I’m thinking about.

1. Buy SPY or IWO puts. I follow this guy on Twitter and he is usually pretty solid with predicting short term and long term trends based on technical analysis and market conditions. He does not recommend buying puts until the downtrend is confirmed. Worth a follow for sure for his long term investing thoughts.
https://twitter.com/saxena_puru/status/1215909869670129665?s=21

2. Buy short term Tesla puts if they are cheap. Basically buy one out for every 100 shares you own. Like you said they are pretty expensive. TSLA can be volatile and can be severely impacted if we have more shutdowns. So it might still be a decent option.

3. Increase your exposure to some of the stocks like ZM and PTON. I realize Zoom is already trading at very high valuation but it’s a company that seems to be making all the right moves. I work for a large company that uses Teams on a day to day basis and recently we had our first zoom based discussion. They really are doing a great job of keeping the customer happy. PTON also has done great for me and the product seems to have a lot of satisfied customers and they will continue to grow, pandemic or not.

 

[EV forever]

Thanks for your responses - and thanks to @vikings123 for pointing me to https://twitter.com/saxena_puru/status/1215909869670129665?s=21 twitter feed - that is an excellent thread to follow seems like. I am following him now too. (As a bonus, lots of other stocks he seems to follow and own and freely posts those on his twitter account- maybe worth looking into those when I have some time)

After looking into hedging this some more, it appears that buying puts on TSLA is not a good idea - firstly, they are just too expensive and secondly, it is possible to similar hedging using other puts. Also, frankly I don't like the idea of buying puts and shorting TSLA - just feels wrong to do that.

SPY and IWO puts appear to great, had not considered IWO. Any reason why you would consider IWO over SPY? How about QQQ?

Next question - what strike prices to select for buying the puts? @UnknownSoldier has suggested "lowest strike OTM SPY puts I could buy, they literally costed me $0.05 a contract" others have suggested strikes of 10% or 20% lower than ATM.

 

[adiggs]

SPY and IWO puts appear to great, had not considered IWO. Any reason why you would consider IWO over SPY? How about QQQ?

An observation I have about SPY / S&P 500 related indexes - I now think of the S&P 500- as more like the S&P 50 with 500 company names on the list. And those top 50 are awfully tech heavy. I used to think of it as a reasonably good approximation of the economy; for me, no longer,

The primary learning from that, is to dig into any index or other financial instrument and be sure you understand what you're actually getting. Investors in USO (I think it was) who thought they were gaining exposure to the spot oil market discovered that the fund was well on it's way to insolvency until they changed the fund investment criteria / behavior, so its no longer the spot oil market - it's something different.


Anyway if you're looking for a tech heavy index, then SP500 is there for you. If you want a representation of the economy, then I actually don't know what I would use.

 

[EV forever]

An observation I have about SPY / S&P 500 related indexes - I now think of the S&P 500- as more like the S&P 50 with 500 company names on the list. And those top 50 are awfully tech heavy. I used to think of it as a reasonably good approximation of the economy; for me, no longer,

The primary learning from that, is to dig into any index or other financial instrument and be sure you understand what you're actually getting. Investors in USO (I think it was) who thought they were gaining exposure to the spot oil market discovered that the fund was well on it's way to insolvency until they changed the fund investment criteria / behavior, so its no longer the spot oil market - it's something different.


Anyway if you're looking for a tech heavy index, then SP500 is there for you. If you want a representation of the economy, then I actually don't know what I would use.

Yep - that is true. S&P500 has become very highly dominated by large tech companies. It is also hard to get a good feel on how volatility affects the put prices if the focus is just to get a hedging position.

I looked up some of the possible ETFs that are based on the indexes - also looked up there Exponential Moving Averages and the volatility indexes. See attached. Not yet quite sure how to build a hedging position from this info

 

[Misterbee]

If you are stuck at home with a lot of time on your hands due to COVID, it's possible to do well trading weekly stock options. But you have to watch it like a hawk....