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Senior Advisor

Seasonality And Hedging with Puts

I'm not a fan of puts, though I have some on now and they are treating me right.  The reason I put them on was because I wanted to take a position but didn't want to increase my futures exposure in case the market turned hard against me.  Essentially, it means I'm a chicken.  Otherwise, I'm much more comfortable with a pure futures position.

 

Using the above logic or lack thereof, I see puts best used in the spring in a volatile market year.  That's when I put mine on.  Maybe I should say late spring - around the May-July time when oen is wondering if the market will turn down as it usually does or if there is any reason for it to turn up.

 

Do you see any preference for using puts in what one may call the more volatile season of the year - spring/early summer - or do you see puts having a benefit at any or other times, even when the market seems in a clear trend?

 

I'm considering rolling some futures and puts (if I think there is enough carry in the market) and my selfish quesiton is whethe I should change the puts for futures or continue them as puts.  AS you can see, my leaning is to use futures, but I thought I'd see if there are any other perspectives to consider.

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5 Replies
Advisor

Re: Seasonality And Hedging with Puts

Problem is that implied vol tends to also be at its highest during the spring seasonal high period, so you pay a substantial premium.

 

I've always preferred building a synthetic put by buying a call at the seasonal probability point for a low in price and IV- i.e., late winter, and then selling futures against the call on a spring rally.

 

Doesn't always work- didn't this year as the historic money ramp job ripped prices higher way early. But nothing much lost there as it created opportunities to sell futures or contracts later.

 

Worst case with that tactic is that you waste (a smaller) premium on the call AND don't get sales done although the seasonal put buying tactic has problems in a counterseasonal scenario as well.

 

Sort of comes back to the old "toolbox" talk. Pickig the right tool is almost as important as picking the right price.

 

Advisor

Re: Seasonality And Hedging with Puts

On puts and the thing about picking the right tool from the toolbox.

 

The best money I  ever spent in 2008 was the better than $1 on corn and more than $2 in beans that I spent on puts and plus rolling them up a couple of times.

 

Alternative was to 1)get bled dry with margin calls 2)get nothing done and end up taking very low prices after the collapse.

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Senior Advisor

Re: Seasonality And Hedging with Puts

If you are legging into a synthetic put, do you buy the call at the money, or where?

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Advisor

Re: Seasonality And Hedging with Puts

Typically OTM by several strikes. Try to minimize outlay and make a subjective assessment of what reasonable spring upside might be.

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Senior Advisor

Re: Seasonality And Hedging with Puts

Have you looked to see what the outlay is on a synthetic put versus a standard put?

 

Do you exit the call sometime in the summer if seasonals seem to be working normally, or keep it till you lfit the futures?

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