Recessionary Phase Characteristics: • Avg. downturn of 15% • Avg. duration is 10 months • Interest rates peak, corporate defaults, overexpansion, value loss, deleveraging, hard to obtain credit, and falling inventories even with low sales • Losses across the board • Your primary goal becomes protection of trading capital • Consumer staples, utilities, telecom, and healthcare hold up the best and are the best places to stick toes in the water (perhaps put selling or ITM covered calls) • High yield bonds have high economic sensitivity – will behave more like investment grade bonds in this phase 32 Copywrite 2016 Falcon Global LLC
Industry Level Analysis Necessary: Recession Phase • Credit Fidelity Investments 33 Copywrite 2016 Falcon Global LLC
Asset Class Performance by Cycle Phase – 1950 to 2010 • Credit Fidelity Investments 34 Copywrite 2016 Falcon Global LLC
Normal Cycle • Credit Investools 35 Copywrite 2016 Falcon Global LLC
Key Macroeconomic Indicators • GDP • Inflation & interest rates (CPI and PPI) • Employment • Others include: • Housing (Housing Starts, Existing Home Sales, Pending Home Sales) • Consumer Sentiment (includes Retail Sales, Personal Income, & others) • Industrial Production (Durable Goods Orders, ISM, & others) • International Trade (Trade Balance, International Trade Report) • Government (Discount Rate and Open Market Operations) 36 Copywrite 2016 Falcon Global LLC
Inter-market Analysis • Commodities & dollar • Commodities & bond yields • Yield curve • Key ratios: • Excerpt from Monthly Portfolio Strategy Ratio Report 37 Copywrite 2016 Falcon Global LLC
Recessionary Tells • How long has the current bull market lasted vs. norms? • (graph as of early 2015) • Current bull market is 82 months long Median = 43 months 38 Copywrite 2016 Falcon Global LLC
Recessionary Tells • Macroeconomic indicators 39 Copywrite 2016 Falcon Global LLC
Recessionary Tells • Macroeconomic indicators 40 Copywrite 2016 Falcon Global LLC
Recessionary Tells • Macroeconomic indicators • Falcon Global’s Monthly Portfolio Strategy Report compiles & reviews: • “Big 4” +1 • GDP • CPI • PPI • Unemployment • Yield Curve • Bear Market Indicator Group • Basket of 6 key business cycle indicators with strong track records to demonstrate elevated risk levels that often precede Bear Markets 41 Copywrite 2016 Falcon Global LLC
Late Bull Markets can Still Be Powerful 42 Copywrite 2016 Falcon Global LLC
Recessionary Impact to Portfolio • It is all about not losing capital in the bear markets • Theoretical Bear Market from recent DJIA top o Average Bear Market Decline = 33.5% drawdown o Dow 18,000 goes to DOW 12,000 over a few months period o Can take years to get back to even if you ride it out 2008 rollover to 2009 bear market bottom took 3 years to get back to even 43 Copywrite 2016 Falcon Global LLC
Market Timing • Measuring risk / standard deviation & beta • Thresholds for H edge A ctivation T rigger 44 Copywrite 2016 Falcon Global LLC
Market Awareness Monthly Business Cycle Analysis • Part of member subscription - complete review of key macro-economic indicators to develop consensus opinion of where we are in the current business cycle. • Share periodically some highlights in the Bloomingdale meeting. 45 Copywrite 2016 Falcon Global LLC
Market Awareness Daily Market Preview Analysis • My opinion of current market trends, market timing, volatility, and hedge risk levels for U.S. markets • https://www.youtube.com/c/Falconglobaltraders • Free to subscribe to YouTube channel/ subscribers get notice when content is published • About 10 – 20 minutes published usually by 7:30 AM Central each trading day 46 Copywrite 2016 Falcon Global LLC
Market Awareness News that can shape markets Falcon Global on Social Media @FalconGlobalLLC FalconGlobalLLCTraders StockTwits FalconGlobalTrader Scutify @StephenHarris subscribe to the channel!
Correction Backgrounder - Definitions 48 Copywrite 2016 Falcon Global LLC
Black Swan Definition An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former wall street trader. 49 Copywrite 2016 Falcon Global LLC
Correction Backgrounder S&P 500 corrections of 10% or more, including those that • turned into bear markets, occur nearly every 1.5 years (357 trading days) on average since 1957. The last correction began over two years ago (550 trading days) in the summer of 2011, but that correction was severe and nearly a bear market with a 19% decline. But more importantly, there is enormous variation around the mean of trading days between corrections. The STD is higher than the mean, thus a correction is not more than 80% likely, based on precedent since 1957, until 750 days from the last correction. Moreover, corrections are less frequent the past 25 years vs. the past 50+ years. From 1990 to 1997 the S&P avoided a 10%+ decline (1994 was close), also from April 2003 to September 2007. Thus 4 years without a correction is possible, especially if earnings climb and inflation and interest rates stay low vs. history, but a higher PE raises the risk. 50 Copywrite 2016 Falcon Global LLC
Correction Backgrounder 51 Copywrite 2016 Falcon Global LLC
52 Copywrite 2016 Falcon Global LLC
Correction Backgrounder * Since the end of World War II (1945), there have been 28 corrections of 10% or more, 12 of which had turned into full- blown bear markets (with losses of 20% +). * This equates to one correction roughly every 20 months, according to Dow Jones index maven John Prestbo, who points out that this average does not mean they’re evenly spaced out . 25% of these corrections over the last 66 years occurred during the 1970′s (the Golden Age of Market Timers), another 20% occurred during the secular bear market of 2000-2010. * The average decline during these 27 episodes has been 13.3% and they’ve taken an average of 71 days to play out (just over three months). 53 Copywrite 2016 Falcon Global LLC
Correction Backgrounder * From the beginning of the last secular bull market in 1982 through the 1987 crash, there was just one correction of 10% or more. Between the Crash of 1987 and the secular bull market’s peak in March 2000, there were just two corrections, according to Ed Yardeni. This means that secular bull markets can run for a long time without a lot of drama. * Since the stock market’s bottom in March of 2009, there have been only 4 corrections: In the spring of 2010 the S&P 500 began a 69-day drop of roughly 16%. The widely referenced summer correction of 2011 lasted for about 154 days and almost became a bear market. The correction during the spring of 2012 set up one of the greatest rallies of all time, although it was barely a real correction, sporting a peak-to-trough drop of just 9.9% in just under 60 days. 54 Copywrite 2016 Falcon Global LLC
Correction Backgrounder Prior to the August 2015 correction, the most recent • correction took place in 2011, between the end of April into the end of September. The Dow dropped roughly 16%. The S&P 500 actually dropped a hair over 20% before snapping back, leading some to believe that this was a bear market – the implication being that the current bull market is much younger. * Bull market rallies in between corrections – and there have been 58 in the post-war period – tend to run for an average of 221 trading days before being interrupted and gaining an average of 32%. 55 Copywrite 2016 Falcon Global LLC
Correction Backgrounder * As to what we should do during corrections, I’d recommend maintaining a list of high- quality stocks you’ve been kicking yourself for missing out on and clearing the decks of any longs you don’t truly love. For those with time horizons longer than five years (most), the best thing to do is grit one’s teeth and do very little. If a correction of between 10 and 20% is unbearable to you mentally or financially, that means you’ve either got more money than you should invested in stocks or you’re not balanced to your real level of acceptable risk. Make the adjustment you can live with and remember this feeling the next time you find yourself chasing the market. * As to the question of whether a correction could become a bear market (or worse even, a crash ), the answer is that this is always possible. But most corrections do not become crashes, and every single one of them turned out to have been great buying opportunities in the fullness of time. 56 Copywrite 2016 Falcon Global LLC
Correction Backgrounder 57 Copywrite 2016 Falcon Global LLC
Correction Backgrounder The quickest correction was 18 calendar days in 1955 while • the longest was 531 from September 1976 to March 1978. The longest the S&P 500 went without a 10% correction was 2553 calendar days from October 1990 until October 1997. The second longest streak without a correction occurred in the last bull market that ended in 2007 when the S&P 500 went 1673 days. The fewest number of days between corrections was 35 in 1974. Recent S&P 500’s streaks of more than 1000 days without a correction is nearly twice the average number of days between past corrections, but unlike past streaks of similar or greater length, the current streak is most likely the result of unprecedented Fed liquidity rather than actual economic performance. Based upon past corrections, the current streak could easily last much longer or it could just as easily end any day. 58 Copywrite 2016 Falcon Global LLC
Correction Backgrounder - What past market declines can teach us Stock market corrections are an inevitable part of investing. • They’re also the last thing most investors want to experience. • Here is some historical background to help you put market • declines in perspective. 59 Copywrite 2016 Falcon Global LLC
Correction Backgrounder - A history of declines (1900 – 12/2013) Type of decline Average frequency 1 Average length 2 Last occurrence Previous occurrence – 5% or more About 3 times a year 47 days October 2013 August 2013 – 10% or more About once a year 115 days October 2011 July 2010 – 15% or more About once every 2 216 days October 2011 March 2009 years – 20% or more About once every 3 ½ 338 days March 2009 October 2002 years Events Average Change% Average Duration (Months) Average Recovery (Months) Pullbacks (5 - 10%) 54 7% 1 2 Corrections (10 - 20%) 19 14% 5 4 Bear markets (20+%) 12 28% 14 23 60 Copywrite 2016 Falcon Global LLC
Correction, That’s Nothing; What about Crashes 1962 Flash Crash (U.S.) 28-May-62 Black Monday 19-Oct-87 Friday the 13th mini-crash 13-Oct-89 Failed leveraged buyout of United Airlines causes crash Iraq invaded Kuwait in July 1990, causing oil prices to increase. The Dow dropped 18% in three months, from 2,911.63 on July 3 to 2,381.99 on October 16,1990. 1990-1991 Recession Jul-90 This recession lasted approximately 8 months. Global stock market crash that was caused by an economic crisis in Asia. The points loss that the Dow Jones Industrial Average suffered on this day still ranks as October 27, 1997 mini-crash 27-Oct-97 the eighth biggest point loss in its 117-year existence. Dot-com bubble 10-Mar-00 Collapse of a technology bubble, world economic effects arising from the September 11 attacks and the stock market downturn of 2002. Economic effects arising from the The September 11 attacks caused global stock markets to drop sharply. The attacks themselves caused September 11 attacks approximately $40 billion in insurance losses, making it one of the largest insured events ever. 11-Sep-01 Downturn in stock prices during 2002 in stock exchanges across the United States, Canada, Asia, and Europe. After recovering from lows reached following the September 11 attacks, indices slid steadily starting in March 2002, with dramatic declines in July and September leading to lows last reached in 1997 and Stock market downturn of 2002 9-Oct-02 1998. United States bear market of 2007 – 2009 11-Oct-07 Till June 2009, the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 all experienced declines of greater than 20% from their peaks in late 2007. On September 16, 2008, failures of large financial institutions in the United States, due primarily to exposure of securities of packaged subprime loans and credit default swaps issued to insure these loans and their issuers, rapidly devolved into a global crisis resulting in a number of bank failures in Europe and sharp reductions in the value of equities (stock) and commodities worldwide. The failure of banks in Iceland resulted in a devaluation of the Icelandic króna and threatened the government with bankruptcy. Iceland was able to secure an emergency loan from the IMF in November. Later on, U.S. President George W. Late-2000s financial crisis 16-Sep-08 Bush signs the Emergency Economic Stabilization Act into law, creating a Troubled Asset Relief Program (TARP) to purchase failing bank assets. The Dow Jones Industrial Average suffers its worst intra-day point loss, dropping nearly 1,000 points before 2010 Flash Crash partially recovering. 6-May-10 August 2011 stock markets fall 1-Aug-11 Stock markets around the world plummet during late July and early August, and are volatile for the rest of the year. 61 Copywrite 2016 Falcon Global LLC
Correction Backgrounder - What lessons can we learn from past market declines? No one can predict consistently when market declines will • happen. It’s easy to look back today and say with hindsight that the stock market was overvalued at a particular time and due for a decline. But no one has been able to accurately predict market declines on a consistent basis. In January 1973, a New York Times SM poll of 8 market authorities predicted that the market would “move somewhat higher” in the future. The Dow industrials proceeded to decline 45% over the next 23 months. Then, although almost no one predicted it, the Dow rose 38% in 1975. 62 Copywrite 2016 Falcon Global LLC
Correction Backgrounder No one can predict how long a decline will last. • Since 1982, with few exceptions, market declines have been relatively brief. Earlier market declines have lasted longer. After the 1929 crash, it took investors 16 years to restore their investments if they invested at the market high. In 2000, it took about 5 years. But after the 1987 crash, it took about 23 months to get back. In 1990, it took about 8 months. All cases assume dividends were reinvested. 63 Copywrite 2016 Falcon Global LLC
Correction Backgrounder No one can consistently predict the right time to get in or • out of the market. Successful market timing during a decline is extremely difficult because it requires 2 near-perfect actions: getting out and then getting back in at the right time. A common mistake investors make is to lose patience and sell at or near the bottom of a downturn. But even if you have decent timing and get out early in a decline, you still have to figure out when to get back in. A bear market is not usually characterized by a straight-line decline in stock prices. Instead, the market’s downward trend is likely to be jagged — showing bursts of stock price increases, known as “sucker’s rallies,” and then declines. 64 Copywrite 2016 Falcon Global LLC
Correction Backgrounder Living with a market decline isn’t easy, but if you understand • these lessons, you’ll be a more intelligent investor. 65 Copywrite 2016 Falcon Global LLC
What Does Volatility Tell Us? Increasing Volatility Chart 66 Copywrite 2016 Falcon Global LLC
What Does Volatility Tell Us? Decreasing Volatility Chart 67 Copywrite 2016 Falcon Global LLC
Correction Backgrounder – Vol Spikes 68 Copywrite 2016 Falcon Global LLC
Synopsis of Hedge Fund Strategies It is important to understand the differences between the • various hedge fund strategies because all hedge funds are not the same -- investment returns, volatility, and risk vary enormously among the different hedge fund strategies . Some strategies which are not correlated to equity markets are able to deliver consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds. A successful fund of funds recognizes these differences and blends various strategies and asset classes together to create more stable long-term investment returns than any of the individual funds. 69 Copywrite 2016 Falcon Global LLC
Key Characteristics of Hedge Funds Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded. Hedge funds are flexible in their investment options (can use short selling, leverage, derivatives such as puts, calls, options, futures, etc.). Mutual funds are often limited. Hedge funds benefit by heavily weighting hedge fund managers’ remuneration towards performance incentives, thus attracting the best brains in the investment business. 70 Copywrite 2016 Falcon Global LLC
Facts About the Hedge Fund Industry Estimated to be a trillion dollar industry, with about 8350 active hedge funds. Includes a variety of investment strategies, some of which use leverage and derivatives while others are more conservative and employ little or no leverage. Many hedge fund strategies seek to reduce market risk specifically by shorting equities or derivatives. Most hedge funds are highly specialized, relying on the specific expertise of the manager or management team. Performance of many hedge fund strategies, particularly relative value strategies, is not dependent on the direction of the bond or equity markets -- unlike conventional equity or mutual funds (unit trusts), which are generally 100% exposed to market risk. Many hedge fund strategies, particularly arbitrage strategies, are limited as to how much capital they can successfully employ before returns diminish. As a result, many successful hedge fund managers limit the amount of capital they will accept. Hedge fund managers are generally highly professional, disciplined and diligent. Their returns over a sustained period of time have outperformed standard equity and bond indexes with less volatility and less risk of loss than equities. Beyond the averages, there are some truly outstanding performers. Investing in hedge funds tends to be favored by more sophisticated investors, including many Swiss and other private banks, who have lived through, and understand the consequences of, major stock market corrections. Many endowments and pension funds allocate assets to hedge funds. 71 Copywrite 2016 Falcon Global LLC
Popular Misconception The popular misconception is that all hedge funds are volatile • -- that they all use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities, and gold, while using lots of leverage. In reality, less than 5% of hedge funds are global macro funds like Quantum, Tiger, and Strome. Most hedge funds use derivatives only for hedging or don’t • use derivatives at all, and many use no leverage. 72 Copywrite 2016 Falcon Global LLC
Hedge Fund Strategies Aggressive Growth • Distressed Securities • Emerging Markets • Fund of Funds • Income • Macro • Market Neutral • Market Timing • Opportunistic • Multi Strategy • Short Selling • Special Situations • Value • 73 Copywrite 2016 Falcon Global LLC
So Where are We Now? Your portfolio strategy matters … • Your risk tolerance matters … • Your understanding of pullbacks, corrections, and bear • markets matter… Your attitude towards hedging matters … • Your ability to make decisions sometimes under stress, your • judgement, and your level of engagement will all impact what you will ultimately decide is right for you in your approach to hedging. Understanding the tools of the trade for hedging build • confidence to apply the right tool to the right situation. 74 Copywrite 2016 Falcon Global LLC
Hedging Basics What do you want to hedge? • What is your risk profile? • How much to hedge? • When to hedge? • How much time do you need your hedge? • When to exit your hedges? • 75 Copywrite 2016 Falcon Global LLC
What do You Want to Hedge? Sometimes easier to think of what may not need to be • hedged? Defined risk positions such as option spreads, option income o Bond positions o Stock positions that are already hedged with long puts etc. o What is your risk? • Understand how to use your analysis tab and to segregate what you o need to evaluate risk on. 11 level risk profile o How much to hedge? • Personal judgement influenced by level of current market risk o opinion. 76 Copywrite 2016 Falcon Global LLC
When to Hedge? Time frame matters • Different tactics for long term, intermediate, and short term • hedging Long term – months • Intermediate term – weeks to months • Short term – intraday - days • 77 Copywrite 2016 Falcon Global LLC
Risk Opinion You need a systematic method to determine your market • posture and risk level assessment. Needs to be as objective as possible, emotion rides high when • the market is under stress, as are you! 0 – 3 system with 3 being the highest. • I will utilize + as half step increments sometimes. • What does a hedge risk opinion mean? • Rules defined system with some judgement applied to come • up with a daily hedge risk level. Can use my system, someone else’s opinion, or your own but • have a system! Remember it is an opinion, and only you know your own risk • tolerance and financial situation. 78 Copywrite 2016 Falcon Global LLC
Long Term Hedging Tactics - SOP Risk management begins with smart target selection. • Every trade starts with a predefined target and decision point • stop loss. Remove risk whenever appropriate. • Understand the return on capital per day in trade concept. • Utilize closing orders to remove risk on any shorts. • Consider 80% of maximum profit target objectives for short • option trades. .05 closing orders • Uncorrelated diversification strategies for core portfolio. • Inverse ETFs such as SH. • 79 Copywrite 2016 Falcon Global LLC
Hedge Risk Level 0 (Normal) • Actions: o Simply following standard operating procedures o Setting up passive long term & intermediate term hedges when volatility is low. 80 Copywrite 2016 Falcon Global LLC
Hedge Risk Level 1 (Yellow Light) • Actions: o Stop all intermediate or long term bullish trades o Review and tighten up stops o Consider taking off partial profitable positions such as 30% of position if you are up 30% or more. o Reduce position size of new short term bullish swing trades, consider entering half and entering the second half on a pullback with the same stop. o Sell covered calls See covered call enhancement rules for stocks you own Portfolio covered calls over entire portfolio o Buy protective puts for stocks you own. o Sell bear call spreads on the weakest index. o Set up volatility bombs (put calendars). 81 Copywrite 2016 Falcon Global LLC
Hedge Risk Level 2 (Red Light) Actions: • Stop all bullish entries • Start bearish directional trades • May shut down short term bullish trades • Invoke long Delta bearish hedging strategies • Hedge Risk Level 2 potential action steps: o Double check your alerts for key support areas that would trigger additional actions. o Double check all of your stops; whether hard stops or alert stops to trigger a judgment call by you. Have your thoughts collected as to what decisions and strategies you might want to invoke. Be prepared. o Calculate your long delta portfolio exposure. You need to know how much long delta you might want to hedge, and what percentage you might want to hedge. 82 Copywrite 2016 Falcon Global LLC
Hedge Risk Level 2 (Red Light) • Beta weight in SPY and then look up the 30 day expected move and multiply the SPY beta weight x 30 day expected move x 3 for a 3 standard deviation move. This should give you the extreme expectation. o Consider lightening the exposure if you are not happy with the amount of exposure given the current risk level. • Consider closing out any bullish swing positions or at least review each for tightened stops; or to manage profit management more closely. 83 Copywrite 2016 Falcon Global LLC
Hedge Risk Level 2 (Red Light) • Add up all your core put selling positions. If you were to be assigned everything that you have on are you really ready to accept that. Remember at least for those that are modeled here we said that we were willing to own those shares in that position size at that strike. • Are you really? • Do you have enough trading capital to actually take possession of all those puts? • Now is the time to ask those questions and insure you have a plan? 84 Copywrite 2016 Falcon Global LLC
Hedge Risk Level 3 (Crash Warning) Actions: • Manage hedges until line turns positive and then start scaling out. • Manage directional bearish swing trades until market posture turns positive and crosses above 20. • As situation bottoms can start to but on put credit spreads, back ratios, and sell puts on core portfolio positions. 85 Copywrite 2016 Falcon Global LLC
Hedge Risk Level 3 (Crash Warning) Actions: • Consider buying calls or leaps on stocks you want to own. • Follow Through Day (FTD) – signal to return to bullish trends and to remove any remaining hedges. o Starting from Day 4, index must be up at least 1.25% to 1.7%. The most powerful follow through usually occur on the 4 th to the 7 th day of a rally. • ($VXV/$VIX) closes an entire candle above 1.00 after having previously closed below 1.0 86 Copywrite 2016 Falcon Global LLC
Long Term Hedge Strategies – 12 months long Goals: To protect our overall Portfolio over a longer period • of time, i.e. 12 months. Goal is to be as inexpensive in cost and commission • as possible. Goal is to be as Theta Friendly to reduce cost. • Goal is to be as user friendly in set up and easy to • manage as possible. Goal is to be maintenance free as possible. • 87 Copywrite 2016 Falcon Global LLC
Long Term Hedge Strategies – 12 months long Vehicle - SPX Expiration - 1 year If you do not have a 1 year or 365 (or so) expiration, you can do a little math and see where you get more bang for the buck…. shorter or longer. In necessary usually prefer to go out further, rather than closer in. If you were to come in too much closer, 8-9 months for example, you still have expensive contracts and Theta Decay, but you tend to give up some time coverage. 88 Copywrite 2016 Falcon Global LLC
Long Term Hedge Strategies – 12 months long Vehicle - SPX Strike 10 Delta puts. If you do not see a Delta 10, go to 11. This trade set up has a lot of Long Vega and the Vega will cause the position to dramatically increase in profit as well. Adjust your volatility by 20% to project a typical “crash” Position sizing – 1 contract per $100,000 portfolio needing a hedge. 89 Copywrite 2016 Falcon Global LLC
Long Term Hedge Strategies – 12 months long Vehicle - SPX Adjustments You will lose value to Theta Decay almost daily. If the SPX continues to go higher you will start to lose some of the pricing benefit. 2 indicators to keep in mind; price and time Your Indicator # 1 is Price When you reach the ½ way point to your expected move on the UPSIDE, it’s time to roll it up. Set an alert. Indicator # 2 is Time We will “roll” the PUT at 6 months out. This started as a 12 month trade, so in the 6th month, you should; Buy a new 12 month PUT for protection and then immediately sell the original SPX put. 90 Copywrite 2016 Falcon Global LLC
Intermediate Term Hedge Strategies – 4-5 months long To protect our overall Portfolio over a medium • period of time, i.e. 4-6 months. Goal is to be as inexpensive in cost and commission • as possible. Goal is to be as Theta Friendly to reduce cost. • Goal is to be as user friendly and easy to manage as • possible in set up. Goal is to be maintenance free as possible. • 91 Copywrite 2016 Falcon Global LLC
Intermediate Term Hedge Strategies – 4-5 months long Vehicle - VIX You may not realize that the VIX has slower Decay than most • other vehicles. The VIX is one of the few instruments that will “over estimate” • a move, due to fear. We will use this to our advantage. Remember we are not trying to predict the magnitude of any • sell off, only relying on the fact that we will get a sudden and sharp move in the VIX. In using this strategy, we are not creating blanket “protection” • as with the Long Term Trade, but rather setting up the trade to profit from Volatility in a downdraft and thus offset portfolio losses. This will be a high risk / reward trade or high “payout” if the • market sells off. 92 Copywrite 2016 Falcon Global LLC •
Intermediate Term Hedge Strategies – 4-5 months long Vehicle - VIX Expiration - go out 4 to 5 months. • Variations in using 4 or 5 months are determined by comparing prices. • Basically, if I can get an extra month for .05 or .10, I will go to 5 months. Choose your Strikes • We will be buying an ATM 10 wide CALL Debit Spread vs. buying long • CALL’s. We will choose our Strikes by simply buying ATM, at the money, and then • selling against the ATM with an OTM, out of the money CALL. Position sizing – 5 contract per $100,000 portfolio needing a hedge. • There are two things will happen with the VIX Trade as with the SPX Trade. • Although lower, you will lose value to Theta Decay almost daily. • If the VIX continues to go lower you will start to lose some of the pricing • benefit. 93 Copywrite 2016 Falcon Global LLC
Intermediate Term Hedge Strategies – 4-5 months long Vehicle - VIX Adjustments: • We will “roll” the Spread at 2 to 2 ½ months out. Set an alert. • This started as a 5 month trade, so in the 2th month, you should consider; • Buy a new 4-5 month VIX Spread for protection and then immediately sell • the original VIX Spread. 94 Copywrite 2016 Falcon Global LLC
Intermediate Term Hedge Strategies – 4-5 months long Index Bear Call Spreads SPX • Phase 2 bear market type • 20 – 60 DTE • .30 - .40 Delta, then buy 20 points higher • Exit 4 – 10 days to expiration or sooner at 80% of maximum gain • 95 Copywrite 2016 Falcon Global LLC
Intermediate Term Hedges -Volatility Bombs Buy index put calendar spreads to hedge mortgage strategy, iron condors, • and other option income strategy downside risk. Carpet bomb – spread the put calendars around area of risk – single • contracts applied to any strike and expiration. 30 DTE short and at least 60 DTE long. • 1 put calendar for every 8 $10 wide put spread. • Close when short option is a 3 Delta. • Close 4 – 10 days prior to expiration of the short option and reinitiate a • new put calendar. Buffer against big down moves to allow you to close put credit spreads or • execute other hedge tactics. 96 Copywrite 2016 Falcon Global LLC
Intermediate Term Hedges -Hybrid Volatility Bombs Buy index bearish put butterfly hedge mortgage strategy, iron • condors, and other option income strategy downside risk. When to put on: • ~56 DTE and the RUT has moved up at least 40 points without • a significant pullback. What – • 1 st tranche RUT index with center strike ~ 15 – 30 points below o current price. 2nd tranche if RUT continues to move up another 20 points o 3rd tranche if RUT continues to move up another 20 points o o Manage as a combined position rolling the tent as necessary with leap frog o Exit at 30% profit target based on total capital allocated. o Works beautifully in combination with SPX bull put mortgage strategy. 97 Copywrite 2016 Falcon Global LLC
Short Term Hedge Strategies – days to weeks This strategy is approximately 1 week to 1 month long and is designed to • hedge against an “event” such as FED meeting, NFP, Greek referendum, Interest rate hike, etc. To protect our overall Portfolio over a short period of time, i.e. 1 week to 1 • month. Goal is to offer protection for a known event, or for a very short timeframe. • This trade will be expensive, so the Goal is to take it off if it goes against us. • Goal is to be as maintenance free as possible. • Goal is to use a little theta as possible. • 98 Copywrite 2016 Falcon Global LLC
Short Term Hedge Strategies – days to weeks Vehicle - SPX Remember we are trying to create “blanket” protection for a very short period of time or an upcoming event. This will be a little more maintenance as you need to watch your theta and your P/L closely. Expiration For this strategy, we will use a standard Calendar Trade, but will “lean” it Bearish. I like to go out 30 days for the front month and 60 days for the back month. This keeps your theta decay as low as possible. I would consider expirations as close as 25 days on the front month, but this is not a weekly trade so I prefer to go to 30 days if possible on the front month. I would consider expirations as close as 55 days on the Back month, but again, this is not a weekly trade so I prefer to go to 60 days or longer if possible for the back month. We will be comparing cost here and using the most cost effective method. 99 Copywrite 2016 Falcon Global LLC
Short Term Hedge Strategies – days to weeks Vehicle – SPX Strikes • We will be buying a bearish calendar so I want to set my strikes to be ½ way • to our expected move on the downside. We will choose our strikes by simply looking at our expected move and • then going at LEAST ½ way lower than the full expected move. We use either CALLs or PUTs • Volume in the Strikes should not be an issue here as the SPX will typically • have decent volume. Position sizing – 5 contract per $100,000 portfolio needing a hedge. • 100 Copywrite 2016 Falcon Global LLC
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