ORATS founder Matt Amberson joins SafeDay Trading's Mark Stowers to discuss portfolio hedging, backtesting and market triggers.
Listen to the full podcast here...
Portfolio hedging is tricky. Since options are a decaying asset, protecting your portfolio can be expensive. In the podcast, Matt shares tips for choosing hedging strategies. Matt has found that way out of the money, long term put options can often pay off handsomely when the market corrects -- as implied volatility spikes, and most other financial assets go down. Moreover, in times of calm, there are strategies that can offset the theta burn experienced by the long put strategy, even though the long term puts do not have the theta decay that other put strategies do.
Backtesting millions of strategies has shown that typical hedging strategies, like 30 day and 30 delta puts are extremely costly and that collars (with the additional short call) do not provide a good way to pay for the expensive puts. Short term short puts and short put spreads against the way OTM long term puts mentioned above can provide an offset to the costs without straining the protection, especially if the short puts are done in lower ratios than the longs.
Market triggers developed by ORATS and tested in many scenarios can help with timing of the short put strategies. Identifying duress in the market with triggers like contango, implied volatility direction, and forward volatility relationships, can help avoid bad times to be in particular strategies.