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Market Measures

The Downside

Mar 10, 2015

We are often asked about our hedging strategy and if it makes sense to buy puts in order to protect a long equity position. Typically, we will not do this since the theta decay of the long options will work against. However, is it viable to sell a call against a long put to form a collar and still protect a long equity position.

Today, Tom Sosnoff and Tony Battista look to a study that tests the validity of buying a put when the market was crashing for 2007-2009. They find out that the cost of these long options was too high and the protection that they provided did not offset it. Then they take the study one step further and look to sell a call against the put to reduce the cost basis. All of the trades were placed for an overall credit so there was no risk to the downside. These "cash-less" collars performed better but the strategy was still not profitable!

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