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Buy & Hedge Retirement Strategy Incorporates Unique Roll Up

By Derek Moore

Key Topics:

  • Buy & Hedge Retirement Strategy Position Adjustments
  • After pullbacks > 5% configure positions to capture more of potential rebound
  • Adjustments without adding additional max loss risk
  • Bringing in expiration dates further in time

Today many advisors and clients might notice some adjustments within the Buy & Hedge Retirement strategy. Many long-time users of the strategy might be familiar with the premise of opportunistically rolling the long call positions while the markets press to new highs to reduce participation in downturns.

The adjustments today are much different for a couple reasons. I’ll also explain the benefits for your clients. ZEGA’s trading team conducted research evaluating the behavior of various option positions after drawdowns of more than 5% in the market. In this case we are referring to the S&P 500 Index.

Typically, while not guaranteed, markets have historically rebounded after the > 5% drawdown. Yet often the portfolio’s capture of that rebound has been much less than the corresponding drawdown.

For this adjustment rather than extending the expirations out further, we proportionally rolled closer in time and increased the number of contracts by a ratio of 3 to 1. For example, if we used the December 2021 Call Strike of 300 on the SPY, an account will go from holding one of those calls to three of the March 2021 Calls 334 Strike. This roll “up and in”, is implemented with little or no additional cost to the accounts as the call sold is worth 3 times the on purchased. In the example above, the 300 Call was sold for about $36, while the three 334 Calls were purchased for $13 each. ( 3 x 13 = 36) As you can see that no additional value was placed at risk.

So, what is the benefit for your clients with this move?

One of the main keys is the idea of capturing more of a potential rebound. The construction of the new positions has a higher share count, three times to be exact. This enables more participation in total on the way up than the original position would have rebounded.  

The other aspect of this adjustment is that it also gives ZEGA’s traders more options (pun intended). This might include selling upside call premium or further adjusting contracts to optimize risk and reward for your clients.

Buy & Hedge Retirement is utilized by advisors to reduce downside equity risk while still allowing for equity participation within portfolios. This latest pullback is another reminder as we stated yesterday of why we are such hedging advocates.