IRA accounts are usually long Delta and while they can utilize a strategy like a Covered Call they are hindered because they cannot sell naked calls as it is an undefined risk strategy. So what ways can we use to reduce our delta risk in an IRA account? Some so-called experts may tell you that if you had a portfolio long 1000 beta-weighted deltas that you could take off risk by selling some or all of your position. We approach things differently.
First we looked at a table displaying the correlation between SPY, the ETF of the S&P 500 and what we use for beta-weighting, against two ETFs with a negative correlation and two very liquid large cap stocks with positive correlations. The ETFs were TLT, the bond ETF and SDS which is an inverse 2x leveraged ETF of the S&P 500. The two stocks were FB and AAPL which have positive correlations.
We then looked at another table which displayed various strategies to create negative deltas in order to reduce long portfolio delta risk. The table included the trade, contract size, position delta, SPY beta-weighted percentage and portfolio delta. The trades included selling Synthetic Calls (SPY), Short Vertical Put Spread (TLT & SDS), Long at-the-money (ATM) Put Vertical spreads (FB) and a long Broken Wing Butterfly in AAPL. By including these strategies we were able to reduce our long portfolio delta exposure by half. These strategies enhance our cost basis and generate positive Theta (time decay).
For more on Delta Adjustments see:
Best Practices from December 22, 2014: “Delta Neutrality”
Best Practices from August 3, 2015: “Delta Neutral”
Options Jive from October 21, 2015: “Reducing Futures Deltas”
Strategies For Your IRA from October 28 2015: “Portfolio Delta Adjustment”
Watch this segment of Strategies For Your IRA with Tom Sosnoff and Tony Battista for the important takeaways and to understand how to utilize various strategies to reduce portfolio delta risk in an IRA account.
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