I recently wrote an article on hedging our Team Alpha portfolio and listed an assortment of put options to buy for specific stocks. The article was written before we took this nose dive and was suggested for everyone to consider. Team Alpha took the $1500 from cash reserves to buy the puts suggested. Let's take a look at how this strategy has worked.
Our portfolio now consists of Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Linn Co, LLC (NASDAQ:LNCO), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), and General Dynamics (NYSE:GD).
Here Are The Put Options We Selected
Team Alpha spent $1500 to purchase these positions. Now let's see what they are worth as of today:
Thus far, the puts have produced a gain of roughly $1500 for the Team Alpha portfolio. If I were to sell these puts right now, those funds would go directly into the cash reserves.
The result would be a "hedge" of roughly $1,500 in the total value of the portfolio. Since the total value of the portfolio is roughly $123,000 as of the last update, the hedging used has mitigated a 1.2% drop within the portfolio.
It appears that as of now the portfolio has dropped by about 5.5% (give or take some fractions). That means by using this hedge strategy, the portfolio is only down 4.3% as of right now.
Actions To Be Taken Now
I will be selling these put positions the day before Thanksgiving. I do not want the time value erosion to begin taking away from the hedge protection. I also believe that there could be some clarity from Washington either just prior to, or just after the holiday.
By selling the put positions, I will then place the cash received directly back in the cash reserves of the portfolio. This will also give the portfolio additional "dry powder" to add to positions that have over-corrected.
The Bottom Line
Using a hedge strategy with specific puts is not perfect and I am not a huge fan of any hedging. In this particular instance, we can all see how it has worked.
In the future, a prudent investor might want to consider a simple hedging strategy to defray some losses in a market correction such as what we are seeing right now.