Friday, October 10, 2014

Now that the Market is Down, How is the Protective Put Strategy Working?

Recall that I was going to use a "Protective Put" option strategy in the rebalancing of my portfolio back in the Summer.  The reason was that I had excess small cap stocks (ETF) in my portfolio and I did not want to sell until next year for tax reasons.  The Protective Put allowed me to protect against the downside that small cap stocks decline before I sell next year, effectively allowing me to sell this year without actually selling.

Here is the status of the strategy, which seems to be working.  The small cap ETF has gone up (9/16), then down (10/10) with the market, the PUT first declined in value, then rose above the purchase price.  Net of all this, I am down $1016, but without the put my loss would be higher at $1604.  The PUT does not track its intrinsic value that well because the volume is low, so it may increase in future.

Protective PUT for Vanguard Small Cap ETF (VB)
Before Option PurchaseOption Purchase 8/159/6/201410/10/2014
200 shares VB$22,712.00$22,702.00$23,354.00$21,098.00
200 PUT options (Dec2014)$0.00$800.00$500.00$1,388.00
Cash$0.00-$800.00-$800.00-$800.00
Total$22,712.00$22,702.00$23,054.00$21,686.00

So I am still satisfied with this strategy, it has allowed me to delay the sale of these ETF shares with much lower downside risk than just holding until next year.

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