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I have my investments split roughly half and half between US and Canadian equities. I don't have any bonds as I feel that they are priced close to their maximum potential. Instead to offset a potential downturn I purchase out of the money Put options on the SPY ETF in order to hedge my US holdings. The trouble I'm having is with finding a similar vehicle to hedge my Camadian holdings. I investigated the option chains for XIU, ZCN and some other broad equity Canadian ETFs but they all seem to have very sparse option chains with virtually no liquidity and MASSIVE bid/ask spreads. How best to go about hedging my CAD holdings then? If Canadian option trading is so thin should just bite the bullet and purchase more SPY put options and deal with the very imperfect correlation between TSX and S&P 500 or is there a better way?
 

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Agreed.
If your goal is to hedge your equity, I would say buy more SPY puts.
In my opinion, the correlation between the S&P500 and the TSX is close enough for hedging purposes.
 

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You can short sell the XIC.
Unlike going long puts, you will need margin, and will have to pay its dividend, but it will give you a near perfect hedge of the TSX.
 

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i agree also.

the only canadian index underlying with any real liquidity is XIU - i don't believe that others such as zcn will ever develop decent option markets.

but for more than half-a-year now, premium has been leaking out of XIU options. I'm not sure what is causing this, but a party looking to hold XIU & write calls or collars - or trade puts - is out of luck.

today i was looking at the march 2014 XIU chain. The B/As were so big you could drive a TTC railcar between them. The 2015s looked normal, so obviously the deviation was a temporary issue affecting the 2014s. It will probably correct itself in a day or 2. However the effect upon a retail investor looking to trade these dysfunctional montreal exchange option markets in good faith is to drive that investor far away, permanently.

i myself don't buy protective puts, but if i did & if i were comfortable with my SPY experiences, i'd stick to em em even for the canadian part of my portf.
 

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neoabraxas, as always, there is a fancy new ETF for anything you ask for - Horizons Universal Canadian Black Swan ETF (HUT)
It seems to hold the TSX 60 as the primary holding, and then use long puts and short calls to "protect" the portfolio.
There isn't sufficient history yet - 8 months only.

You can implement similar strategies on your own for a far lower cost (it has nearly 1% MER and a 20% outperformance fee, similar to a hedge fund).
 

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neoabraxas, as always, there is a fancy new ETF for anything you ask for - Horizons Universal Canadian Black Swan ETF (HUT)
It seems to hold the TSX 60 as the primary holding, and then use long puts and short calls to "protect" the portfolio.
There isn't sufficient history yet - 8 months only.

You can implement similar strategies on your own for a far lower cost (it has nearly 1% MER and a 20% outperformance fee, similar to a hedge fund).
gosh, this is what i do. I don't buy the puts, though.

don't buy HUT. It's going to be another Horizons option loser. Their other option etfs have performed poorly.

HUT sounds like a collar job. But the underlying to hold in collars is a high dividend payor like BCE, not some nebbische like XIU.

the only reason i hold 3000 XIU long plus sell calls is that i regard it as kind of a bond proxy. In the sense that XIU is never going to go bankrupt. Which one cannot say about all corporate bonds, certainly.

but apart from its role as a defensive position, long XIU is a bummer. I've had this thing since 2001. Paid 11.32/unit. So-so performance ever since, even with distributions & options. An investor with his or her head screwed on can do better.
 

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neobraxas

A few years back the very deep in the money leaps going 2 years out for both the calls & the puts on the spy & spx had no premium & the intrinsic value was trading @ a small discount to its market value if sold @ exploration. If the investor went long both a call & a put @ the same time & held the position till exploration no money would have been lost.

If the position was held for a year & the market moved up big or down big. The call or put that was increasing in value due to the market moving in its direction, the call or put would have no choice but to move close to point for point to the move in the market & increase in value by that amount. The rally or decline that moved against the call or put which caused it to lose intrinsic value would expand in premium as it got closer to the money, then lose premium as it went further out of the money.

The above is kinda hard to explain & Iam not the best @ explaining it

I dont know if this ever occures with options in Canada. If it does it might be an option to consider.
 

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"...but apart from its role as a defensive position, long XIU is a bummer. I've had this thing since 2001. Paid 11.32/unit. So-so performance ever since, even with distributions & options. An investor with his or her head screwed on can do better."

@HP - what do you suggest as an alternative to XIU over this/the long haul? Puts for XIU or another security? XIU 10-year returns to date are about 9%. That's solid, no?

http://ca.ishares.com/product_info/fund/performance/XIU.htm
 

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MOA i am picking up 2 issues from your post, so not sure which one you wish to pursue (indeed we seem to have bifurcated the topic when HUT was introduced, HUT being an etf with both long & short components):

the issues are:

1) is XIU a worthwhile long holding in its own right;
2) can puts on XIU be used to protect a diversified canadian stock portfolio.

i'll answer 1) first, as best i can. There are many reasons why one might not choose XIU as a flagship canadian equity etf. Many point to its overweighting in banks & energy, since many of the top 60 companies belong to these sectors.

i'll just focus on that claimed 10-year total return that's north of 9%. Alas, i cannot believe this. XIU is an etf that likes to return special dividends most years & i suspect iShares is including these in its claimed "total return." But the special dividends are ephemera that have nothing to do with the here & now. They must be reported as taxable income in the year they are declared, even though they pay no cash & they offer no new units.

every year a sad chorus of investors phones up their discount brokers & wails about this unhappy event. But it's a fact of life: you pays you taxes now, you adjusts you cost base up, you receive a great big fat zero in real time, but some year in the far-off future when you go to sell the units you will have slightly less capital gains tax to pay because of ACB write-up, whoopee.

so i believe that i-Shares, in arriving at that whopping 9% total return, may have included all those special dividends paid out over 10 years. But i myself would never include these in any practical or realistic return calculation.

i just looked up my records. I first bought XIU in june 2001, paying 45.05 per share. Stk subsequently split 4/1 so the cost base became 11.26. Stk is presently 17.71. For a party who has never sold, this is a paper-only gain of roughly 57% over 12 years, or very roughly 4.75% per annum. Meh.

if one includes the distributions - there are quarterly distributions paid out in cash or in new shares - plus income that one can receive from selling calls on XIU, then this etf does become more appealing. Still, for a stock-plus-options strategy, i generally look for a slightly better return that XIU can provide.

as i mentioned, the huge & overriding appeal of sleepy XIU for me is its defensive posture. It is probably never going to go bankrupt, so in that sense i feel it is more secure than individual corporate bonds.

2) the 2nd issue has to do with effectiveness of XIU puts as protection for a canadian stock portfolio. For reasons already mentioned - XIU is top-heavy in banks & energy - XIU puts may not be a suitable hedge for a diversified canadian stock portfolio. Plus these puts will present the notorious market rigidity that characterizes canadian options.

in other words, as avrex suggests upthread, the OP - who wishes to hedge his canadian stocks - might just as well go into SPY puts, where the advantages will be US option markets that are far tighter & more liquid. Plus the OP already had experience with SPY puts & said he was happy with them.
 
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