Today I’d like to touch on portfolio hedging and hedging strategies. There are a lot of ways to hedge a portfolio, and hedging it correctly is important to understand. Some of the more basic ways to hedge a portfolio is to buy units. Now if you buy units in the SPY or the SPX or your favorite hedging vehicle, no problem as long as time and market cooperation is on your side. Now being net long units all the time could be a smart thing todo. Currently I am not long units, but in the next few weeks I might start thinking about adding some downside “market crash” protection. But going into the fall time I will sell off my units, my main purpose to buy units is for any uncertainty in the months of Aug and Sept.
In advance to potentially adding units I have created a SDS collar for Aug. Now to make things perfectly clear I am not bearish on the market, I would rather have some small exposure to the downside then get caught with too many long deltas. My collar is long SDS stock, short the 17 call and long the 14 put. Now for my management behind this trade is if the market goes lower and SDS goes higher I will take the trade off. If the market goes higher and SDS goes lower I will roll my short call down. I’m going to keep this trade as simple as possible. Below is the risk graph of this trade.