No. of Recommendations: 11
Just curious on why you stopped using the hedge.
The strategy as described is very safe, in that the long and hedged positions are entered at the same time. But that's very expensive, in the sense that the hedge is costing you a lot of the expected gain on the long side. I hoped to do better.
First, I went with a bit more trying not add longs when things were cheap and adding hedges when things seemed frothy, alternating the two. So at any given time I was a little over or under hedged, but the gap between one side gaining and the other side losing widens quite a bit that way. This is a good idea only to the extent that you can get a better-than-random gut feel of which is happening at the moment. Not reliable, but seemingly not impossible on average. The VIX itself is not a bad guide. If VIX is over (say) 28, finding good puts to write is like shooting fish in a barrel.
Later on I completely decoupled the hedging from the put-writing. I got much more comfortable with the put writing as a stand-alone unhedged process, and my portfolio had enough other stuff in it that it wasn't an unacceptable risk to be long through thick and thin. I've written over 100,000 put contracts. On the hedging side, I looked more carefully at which part of my portfolio actually needed hedging and how much, and ultimately decided the answers to both were "not that much".
Prices go up and down. If you can live with that, you make a lot more money in any given five year stretch. Almost everybody is trying to make a good buck every single year. I find I do a lot better by simply abandoning that goal and looking out a bit further, since so few players are.
Jim
