I have developed this strategy and have run it for 3 months. It performed pretty well.
\[CORE\_IDEA\]
* In a pool of stocks, find M ones to long and N to short (M roughly equals to N)
* For each stock above, no matter long or short, use \[SINGLE\_STOCK\_HEDGE\] to hedge
\[SINGLE\_STOCK\_HEDGE\]
* Suppose you long 100 GOOG shares (assume spot=350)
* buy 350 put (leg1) / sell 320 put (leg2) / buy 300 put (leg3) / sell 370 call (leg4), DTE: 2 or 3 weeks
* Explanation: leg1/leg2 are main hedge to protect loss for an immediate range, leg3 is to limit extreme loss, leg4 is the funding to reduce overall cost
* If you are short a stock, reverse the hedge combo
Stock pool selection:
* I like to choose from M7 stocks since Vol are high so the funding option effectively reduced cost
* I long stocks when they reach recent lower bound (e.g. META around $530) and short when they reach recent upper bound (e.g. GOOG around $370)
Rationale:
1. "Single stock + option hedge" ensures if you were correct (in long/short), you have reasonable gains, but if you were wrong, most (\~80%) losses are hedged (with a reasonable cost for m7 stocks)
2. The max loss is limited for each stock, meaning your losses are controlled in extreme conditions
3. Based on these single-hedged stocks, you build a market neutral portfolio (long M stocks & short N stocks -- each stock has its own hedging), so that even market moves huge in one direction, you are mostly good
4. Since this overall portfolio has (A) limited max-loss and (B) small losses in most of time (due to hedging for every stock), I'm OK to allocate more fund (e.g. 50% of liquidation) than holding several single stocks (I allocate 30% liquidation in such case). This gave me stable & nice profits.