Hedges (from the morning post):
So this is all part of a LONG-TERM (see above for what I mean by LONG term) investing strategy meant to, in an emergency, give you the buying power you need to make adjustments during a prolonged crisis. If it's a short-term crisis – we don't need to adjust much but what we really need to guard against is a 2008-9 situation, where the market goes down and stays down for close to a year.
There are also, of course, adjustments we make along the way and you'll see, at some point, how we unwind our hedges during a crisis or you can go back and review our Workshop series of articles or just read the last two week's of March's posts and comments.
- Portfolio Repair Workshop Part 1 – Damage Assessment
- Portfolio Repair Workshop Part 2 – Resetting Your Positions
- Portfolio Repair Workshop Part 3 – Adjusting Our Hedges
- Portfolio Repair Workshop Part 4 – Adjusting Our Goals To Reflect Reality
- Strategy For Buying Stocks At A 15-20% Discount
- Portfolio Protection Workshop Part 5 – Don't Get Excited!
- Portfolio Protection Workshop Part 6 – 20 Crisis Trades And Adjustments
- Portfolio Repair Workshop Part 7 – Pressing our Hedges (Just in Case)
That last one was May 12th and, since then, we've added more longs and today we added more hedges – that's the usual cycle we go through. Generally, the hedges cost us about 25-30% of our upside but then we hedge the hedges in the STP with fun trades that often mitigate those damages but the primary goal is to steer our LTP and other long portfolios towards a double (in two years or less) while protecting those positions with the STP.
I think HMY is an interesting gamble. They were on a good path pre-virus and were expecting to make 0.40/share going forward. Let's add them to the LTP and see how they play out.
- Sell 50 HMY 2022 $3 puts at $1 ($5,000)
- Buy 100 HMY 2022 $1 calls for $2.45 ($24,500)
- Sell 100 HMY Jan ('21) $3 calls for $1 ($10,000)
That's net $9,500 on the $20,000 spread but the short Jan $3 calls can be rolled to the 2022 $7 calls, now 0.85, if all goes well and then it's a $60,000 spread for $9,500. Meanwhile, if the stock fails to move, we just sell 2022 $3 calls, now $1.40 for $1 and then we have a net $0 trade and only the obligation to own 5,000 shares at $3 ($15,000) so very little risk with a potential $50,000 gain.
