"I've got put options on SPY as well as a portfolio hedge. They lose value every day (theta or the premium you pay for time) and if the S&P goes up puts lose value so fast it would make your head spin"

I wonder if you would compare/contrast with short selling UPRO ?

That is, short selling the triple-long S&P 500 ETF.

The thinking here is that a long ETF (especially a triple long one) loses value every single day[1] due to the natural decay of long ETFs ...

So in a flat market, your short position is positive, and in down markets it is very positive. Further, it's not an option - you're simply short an ETF - so you can hold it through a market rally if you wanted to.

I have never employed this hedge, but it interests me.

[1] except for up-market days, of course ...

I've never tried it. I'm skeptical that a broker would let you short a leveraged ETF since it's a bad deal for them. There are options out there for these but something tells me the decay is priced in or else it's getting into arbitrage territory. I have seen this question asked a few times before but never saw a definite answer.

If you were able to short TVIX or SPXU or any leveraged etf for a long period of time it seems like a near 100% chance of massive gains which makes me think there is a catch.

Shorting ETFs is expensive. You need to borrow the shares from someone in order to re-sell them, and you pay them for the privilege.

Futures work on margin with relatively low fees so if you wanted leveraged short exposure to the US market that's what you'd naturally trade.

One of the posters below who describes buying a put and selling a call at the same strike is describing a roundabout futures trade. The put/call method would have far higher transaction costs, though.

There are also leveraged inverse ETFs like SDS, which I have used at times. You don't want to hold them for more than a few weeks at a time because they decay, but for short-term trading they work fine.

"There are also leveraged inverse ETFs like SDS, which I have used at times. You don't want to hold them for more than a few weeks at a time because they decay, but for short-term trading they work fine."

Yes, that's the point - the idea is, instead of buying the short ETF, you short the long ETF.

They both decay, as you would expect an ETF to do, but by shorting the long, the decay works in your favor...

Another way of looking at it:

Shorting is (roughly given efficient market assumptions) equivalent to buying a put and selling a call at the same strike. If the stock has no chance of going up a lot, the call will be relatively cheap, and so selling the call won't change much.

Edit: on the other hand if it has low volatility in both directions, then both are cheap, and it's a bit more complicated. Buying the put will be cheaper, but shorting will also require less margin because the margin provider will have less risk. (See e.g. http://openmarkets.cmegroup.com/3785/understanding-margin-ch...).

This should cancel out in theory, but might not for various reasons like transaction costs.

Just look at the payoff graphs. This is how options are explained and tested in finance classes and they are usually more accessible than textual descriptions.

http://i.investopedia.com/inv/articles/site/short_vs_put.gif

This link is simple and doesn't point out strike price or take transaction fees into account but you can draw similar graphs that do.

Yes, that's a futures (or forward) trade. Doing the whole thing as a forward would be cheaper than trading a put and a call.

That is a very accessible explanation, thanks.

If you are long puts on spy, imho it's much better to fund them with short calls at the same strike, and hedge yourself with long otm calls at 1.2*strike. ie. Forward + Call, as opposed to long put.

Gotta make another trade to neutralize that theta component like a calendar spread. For situations where you're making a bet on a really really big move, ratio spreads are the best.

Never used calendar or ratio spreads. I just avoid options in their final month when theta starts really ripping. I will check them out though.

I had calls on spxs at the start of the year. If didn't work out that well. But I have similar positions again.

Any reason you chose spy over qqq or others?

qqq would probably be ok. I like the open interest and spreads on spy options. I'm not looking to make a killing on options (or I should say I would love to but don't think I could), just looking to hedge out some systemic risk on a buy and hold portfolio.

I've made some huge mistakes, but I'm up 20% overall YTD. Just randomly picking tech stocks with out of the money puts has been profitable enough to stay up 20% even if the majority of them wash out. Biggest hit was 8x.

You are doing it wrong. Every hedge should have positive carry.

I own a diversified basket of stocks that I believe reflect the best of the S&P. Then I have a much smaller position in spy puts. The basket has a positive beta and increases in value much faster than the puts lose value. The puts are sept 205 strike and would be deep in the money if August 2015 or January 2016 happen again. Isn't that positive carry?

I would love to find two assets that are inversely correlated but somehow both have a positive return at the same time, but I haven't found that yet :)

I don't understand. EG, say I'm long a portfolio of US equities that I expect to outperform the market. I want to hedge my risk in case the market drops, but I don't want to limit my upside. What positive carry hedge should I do?