Stock Option Investment Advice

Part 2: Stock, or Portfolio Insurance?

Here is Part 2 of our Stock, or Portfolio Insurance? Series:  Selecting the Right Put

In this video we discuss which broad based ETF or Index Put to Select to Insure an overall portfolio.

In Part 1 you saw that using an SPY Put option (the 250, ATM strike) was better insurance on a portfolio over buying shares of an Inverse or Leveraged ETF.

However, was this the best strike selection?

What about lower strike, lower cost, Out of the Money Puts?

Wouldn’t puts with a higher delta, deeper In the Money perform better?

This video breaks down the costs, outcomes, pros and cons of the different strikes you can use to insure a portfolio.  We also give you an outline of how to analyze which put might be best to insure your portfolio.

I hope you enjoy Part 2, and I look forward to your thoughts and comments!

2 comments

  1. Diego

    Dear Mike, thank you for the presentation. Highly representative of what may happen to many investors. However I find it difficult to apply SPY to a portfolio where SPY is not a real asset (say you have stocks that may be part of SPY, credit spreads, naked puts and some covered calls, but not the SPY itself). All the positions have different expirations and trade sizes to smooth unexpected downturns and allow recovery. I find it difficult to imagine how to use SPY unless I assume some correlation between what I have and the SPY, correlation which of course exists but is not perfect. Is the solution to go for individual position insurance? Can’t wait to attend your part 3. Regards. Diego

    1. Michael Chupka Post author

      Hi Diego! You are correct, and we are going to look at the correlations more in Part 4, but outline other processes we might take in Part 3. I wanted to start with the basic example of owning SPY, or even a portfolio of mostly SPY stocks to lay the groundwork on a decision making process for selecting an option to insure a portfolio. Now that we have shown the basic path and pros and cons of over (and especially under) insurance, we can look at the other market vehicles available to us and how they can apply to a portfolio that contains multiple strategies in different markets. I will say up front that if you are expecting a sudden shift in the market, say a 1-5 day rapid decline, buying calls on the VIX or the 3X Bear ETFs might be the best approach. But, if you are expecting a longer term consistent correction your focus might remain on the further out in time puts on the direct indexes or ETFs (standard, non leveraged). Insuring the positions individually is the most secure, but it might not be the most cost effective. I will have that for you soon…

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