Beta weighting is a popular concept in trading that allows us to measure delta risk across different stock positions. Additionally, the beta weighted delta of a portfolio can be used to create a hedge. If we sold puts in different equities prior to a market correction, how would a SPY hedge determined by beta weighted deltas protect our portfolio?The Study:
- Sold 30 Delta Puts November 8th, 2018, Before the Market Sell Off
- AAPL, IBM, XOM, JNJ, GS
- 45 Days to Expiration
- Held to Expiration
- Compared Cumulative Non-Hedged and Beta Weighted Delta Hedged Performance
In the late 2018 sell-off, the SPY fell 25% and a portfolio of short puts in AAPL, IBM, XOM, JNJ, and GS lost more than $13,000. However, when we incorporate a delta hedge with short shares of SPY we reduce our portfolio loss and volatility by nearly a third! That tastyworks platform inherently displays a portfolio’s deltas as beta weighted to SPY and traders can use this number to determine the amount of shares of SPY to buy / sell to maintain a portfolio hedge.