I have had the majority of my liquid wealth invested in the stock market and I wanted to share what I’m doing these days. As a bit of a background, at the beginning of the year my portfolio primarily consisted of the tech companies I’ve held for years - Netflix, Amazon, Equinix, Google, and Facebook. After the first decline I liquidated about half of my portfolio - my thinking was that I’m still long term bullish about these companies and they will likely emerge stronger but I should hold on to some of my gains and have a bit of cash.
At the same time, I wanted to do something to hedge against the market. My motivation was not to profit as much as add protection in case of a market drop. That’s a good thing since despite the awful unemployment numbers and the decline in consumer spending the S&P seems to be getting close to its value at the start of the year - as if nothing catastrophic has happened.
The approach I took was to buy a variety of Out of the Money put options on the S&P. Options give you the right to buy (call) or sell (put) the underlying stock at a particular price point by a particular point in time (with some nuance around European vs American style). The general idea is that it can be very cheap to buy for low probability events since the likelihood of them happening is very low. And if these events do happen you end up with a very nice return.
My put options are all on the S&P at multiple strike prices and expiration times: June at $180, July at $180, and September at $195. I purchased these a month or so ago and am down over 60% - but that’s the cost of hedging. In hindsight I should have paid the premium to buy longer term options rather than the ones that are one or two months out. Right now I’m going to take the loss on the June and maybe the July options and simply extend the expiration. I’m willing to take the potential loss - my thinking is that if things do work out then it’s great to be back to normal and this was a small price to pay for that return. But if things get worse it’s nice to have some form of a hedge.