Hedging a diversified Portfolio

This is something that was requested about the best way to hedge a diversified portfolio with long term puts. I'm attaching two charts from the Gamma Optimizer, yes the G.O can do hedge analysis, for more information please watch this video: https://youtu.be/o5c0TTBfBGE

Now the original request was to come up with a hedge that was set and forget (1 year or more). So in the analysis I'm simulating a 500 point drop in SPX (about 20% catastrophic crash) in 300 days (so we can get 2018 options at all here). The result is in the first chart as you can see the optimizer is recommending 2 contracts of 2275 puts expiring Jun29-2018 with a total cost of $14,258.95 to cover what should be a loss of $50,000 in the portfolio, as you can see that is a very expensive hedge here (almost 30% of the total unhedged portfolio loss).

The second chart is the same simulation but with a 90 day window instead (the one used by most funds and big portfolios). You can see that the optimizer recommends now 3 puts at 2125 for Nov 30 with a total cost of 2,730 (to cover an unhedged portfolio loss of 50,000) if you do a systematic trade every quarter it could add up to $10K on the annual hedge, which beats the 300 day one.

So as you can see it is much better to hedge every 90 days than having a long term hedging position here. Now if you intend to use the G.O to design a hedge like that please don't forget to use the Stochastic volatility options because the 500 point move is big enough to cause a massive spike in volatility. If you run the simulation that way the hedging costs will be reduced dramatically but the quarterly hedge will always beat the annual one.

SPX hedge1
SPX hedge1
SPX hedge2
SPX hedge2
Leo Valencia hosts the Gamma Optimizer options service at ElliottWaveTrader.net.