When a hedge doesn’t

I hedged against a market drop, but I’m out more dollars than had I not hedged.  Here’s an illustrative tale of how I magnified my loss by $841 (most likely)…

December 12th, I decided to hedge my SPY exposure by buying 3 fairly out-of-the-money puts.  SPY was trading at around 89 and I bought January 80 puts which expire on market close of January 16th. My thinking was as follows:

The holidays are coming up and I’m going to be out of town and generally away from the internet.  I’ll ease my investing anxiety by buying some SPY puts… so I don’t have to worry about about a significant market fall while I’m on vacation for two weeks.  These options will insure my “Crazy Ivan” holding of 100 shares as well as partially ensure holdings outside of my Crazy Ivan portfolio.

In a nutshell I paid $841 for insurance, and never filed a claim.  (This is in spite of the fact that SPY went down from $89 to $86.4.)

Here’s where I really come clean.  I bought these calls even though I felt the VIX was high (it was over 40 at the time, and still is).  In other words, I believed that insurance was too expensive and I bought some anyhow.  Another admission — I bought 3 puts rather than 2 [math to explain 2 rather than 1 omitted] — because it diluted the per contract commission.

Long story, short:  I blew $841.

Now, hindsight is 20/20.  I’m not beating myself up for this trade, but I am trying to learn from it.

The Bottom Line Crazy Ivan money update: $19,227.

* Disclaimer:  The Balhiser Crazy Ivan Portfolio.

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