Australian (ASX) Stock Market Forum

Put Options as a Hedging Strategy

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I was debating whether to post this in the Derivatives section or here but in the end felt that my level was very basic.

I recently went through the ASX's online modules on options after some inspiration from Sir O's beginner's thread.

I would like to use put option's as a hedging strategy in times when I believe it to be a bear market (not right now). I have no desire to use it as means to any other strategies at the moment.

I currently have deployed my small capital to certain blue chips at the end of last year and they have run hard. Right now, I'm going to ride out the good times but I'm trying to devise way to protect my profits when the market turns.

I would like to outline my basic strategy and I would appreciate it if the more experienced members could help me critique it.
  1. Identify when I feel the market will be bearish.
  2. Purchase a long-dated ATM put option
  3. Exercise, sell, or allow to expire worthless.


The alternative would be just to sell out of my positions but I feel that the CGT liabilities, loss of dividends, and loss of exposure to risign share prices are all factors which push me towards a put option stategy. One the other hand, the brokerage fees associated with trading and exercising options might not be worth it?

What do you all think about that very simple stategy? Is simply closing your position much better?

Thanks :)
 
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Re: Put Options as a Hedging Stategy

...

What do you all think about that very simple stategy? Is simply closing your position much better?

Thanks :)
As with so many questions of this type, the answer relies heavily upon a number of factors.

The benefits of dividends, imputation credits, CGT savings etc. need to be weighed against the cost of the protective put/s.
 
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