Buy and Hedge Retirement Portfolio Update: Locking in Gains

by | Sep 19, 2017 | Buy & Hedge, S&P 500/SPX, Technical Analysis

This week our traders made some portfolio adjustments within the Buy and Hedge Retirement strategies to lock in gains and raise the hedge to a higher level (reducing downside risk).

As a reminder, Buy and Hedge Retirement is the strategy which looks to capture much of the equity upside of the S&P 500 Index (or other markets) while substantially reducing the downside participation. You can view this relationship below in the comparative profit and loss chart.

The target downside for the initial investment is capped around 8% max loss and the upside participation ranges from 60-80% participation.

The change involved closing out positions established 9-12 months ago at a significant profit and entering a new call that re-established a floor in the portfolio.

For example:

Accounts with the SPY Dec 17 205 Call might have bought this option in late November when the SPY (SPDR® S&P 500 ETF) was trading at $220 for $24. Last week we closed out that position early (months before the Dec expiration) at $45 while the SPY hit $250 per share.

This means that from a $24 cost basis, the option made $21 ($45-$24).  Not bad, an 87.5% gain. However, the calls represent exposure or a proxy to the broad market. So, the right way to calculate gains is to use the $21 compared to the SPY price at the time of entry. That works out to be a 9.5% ($21 / $220). During the same time, the S&P 500 was up 13.7%, which means our calls had about a 70% participation which is in line with our target.

Additionally, the new position moved the floor up a from 8% below the SPY level back in Nov at $220 per share, to 8% below the current level of $250. That is illustrated in the screen shot below.

Rolling hedges up while markets move higher is one of the hallmarks of the Buy and Hedge strategies. However, it’s worth noting this was not done as part of a directionally biased market posture. Instead it was a matter of keeping the portfolio at target allocations. The way that the floor moves higher is almost how a trailing stop loss order would work where it follows the market higher. The difference though is that stop loss orders are only soft hedges as markets can gap down lower. Or they might liquidate positions only to see markets recover and move higher. The Buy and Hedge Retirement approach lets your clients keep positions on with a hard floor in the portfolio.

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