When the shorts came home

As I played around with my hedge using SPY puts, the strategy was proving increasingly hard to sustain. The cost of trading options was increasingly nullifying the benefit of holding these options and being wrong or minimally right. I had my first discussion with friends regarding this option strategy was in late 2015 and as you can see, I have not had much luck up until now. My apprehension of this strategy comes not from the idea of the hedge but the cost of rolling these hedges up as and when you are proven wrong. Being wrong is part of the hedging game and so rolling up a hedge is the most integral part of the hedging game. By late 2017 I was getting a little tired of being wrong and not being able to effectively keep my positions open due to the cost of rolling up.

By end of 2017 my hedge was getting increasingly limited to VXX, TBF and GLD. ETFs that I can hold with built in fees but no transaction charges and an automatic roll up. But this was not ideal and more of a side hedge on the economy. My equity longs were still mostly unprotected and I had, for the most part, stopped buying SPY puts to cover these longs.

The cracks began to show in January when VXX doubled in the blink of an eye. I was taken aback by the sheer velocity of this move but I was not sticking around to find out. I sold half my position in VXX and held the rest expecting more volatility for the rest of the year. But I still couldn't find a good way to go short the equity market directly.

By summer interest rates started creeping up and TBF started breaking even again, but the equity market came back and by July everybody on CNBC was talking about how the rest of the year is going to be a breeze. The tax cuts were working through the system and things were looking really good.  Since early 2017 I had been liquidating some of my ETF positions in a tax deferred account and trying to get to a 25% cash position. But by August I was getting really nervous with all this talk of nirvana. I finally did the unthinkable and moved my 401K to 25% cash.

During that time I was introduced to Robinhood's free options trading platform. This was what I was waiting for to restart my index short position. This time around instead of the SPY I bought puts in QQQ. Since QQQ had greater volatility I wanted to experiment if that provided better cover than SPY. This was in early August and by end of September I was down 50% on that position. But this time it was different. I had opened positions for early-mid September and was losing money, so I decided to roll up my position into mid October. Since the selling and buying of options had no cost associated with it, the options positions were being built like a equity portfolio by buying in small chunks and cost averaging into the position.

By mid October it was clear the market was turning and I rolled up my position again to mid November and then again to mid December all while the market made its trip down 20% by mid December. I also held a few individual PUT positions in SQ, W and ROKU that worked out really well. W in particular I continue to hold because I believe this is a uniquely bad financial position and has further downside to it. I cut my 90$ PUTs but continue to hold $75 PUTs on it in the hope that real fear is yet to set in into that stock. But the rationale for this short is a post by itself and for another day.

At this point I am out of my QQQ positions. The rationale is that the market is now whipsawing and the premium on all these options now price in Armageddon. I am not willing to pay for that and have now started adding to my long position at a much more acceptable price, PSX and AAPL to name a couple.

The greatest take away this year though was the flexibility a free trading platform provides. The ability to roll up positions is essential in a leveraged time-bound position since the decay is rapid and you need the flexibility to move up or down the chart. While all this was happening the best thing I can say is that I stopped looking at my long positions for the past 3 months when it has lost 20% and am able to stay calm while adding to it at prices that I hoped I could pay just a year back and was looking increasingly unlikely.

Hopefully 2019 will not tear everything down. I don't have sufficient hedges anymore to compensate for a further steep decline. All indications however are that the craziness is not over with 1000 point moves the last couple of days in the Dow.  But the cost of insurance does not justify the hedge anymore. If things really break down I could probably start redeploying the 25% cash I have in the tax deferred accounts.

In the investment world, GE was an utter failure this year. The downturn was swift and complete all the way down to the devil's number of 6.66. I did not exit the investment but probably should have about 20$ ago. I did put on some puts at 12$ and exited it when the stock was at $7. With that I have gone long 2020 at $8 call options, assuming an eventual turnaround on asset value basis. With the options, I hope to break even on the investment by 2020 and have a larger position in overall GE when it hopefully starts paying dividend again and gets back to normal.

XLF was another painful wait. The banks never came back and just meandered around unsure of itself. Now with the market turning and credit being the topic of discussion I am not sure 2019 will be any different. The risks to the big banks seem minimal but that is usually what people say just before it blows up. So, directionally this can go either way.

2017 was very frustrating in that longs were looking too expensive and the shorts were getting slaughtered. This year everyone is running scared after getting what they were all asking for... a healthy correction. The question is, will the healthy correction turn into a nightmare recession.

Things that worked:
- QQQ, ROKU, W and SQ puts
- PFE long

Things that failed:
- GE
- BAC call options for Feb2019. Still waiting for the turn

All said and done, this was the year Robinhood brought the shorts home!


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