Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The 6-Week Options Trading Kickstarter: Hedging, Portfolio Protection, and Avoiding Disaster

By

Steve Smith discusses using options to protect your positions and portfolio.

PrintPRINT

Hedging and Protection

In my options trading at OptionSmith, I try to have individual positions that have their own internal hedges by using spreads. These usually take the form of basic vertical spreads or calendar spreads. The essential function of a spread is that by both buying and selling options on the same underlying security, you will be reducing the impact of changes in implied volatility and time. The strategy you choose will determine which variable you want to de-emphasize.

I also frequently use options on the Spyder Trust (NYSEARCA:SPY) to provide the overall portfolio with broader protection. Typically, individual positions tend to be bullish, while the portfolio protection chunk usually consists of the purchase of puts or put spreads. Let's take a look at how this concept can be applied to a less active and basically bullish-oriented portfolio.

Buying put options does offer the most complete and probably efficient way to hedge a position, but it comes at a cost. That cost, as with all insurance policies, will be a function of the amount of protection and its duration.

The main items to consider when choosing put protection, whether for an individual stock or a broad equity portfolio, are as follows:
  • What magnitude of a decline is expected?
  • At what level of the decline do you want the position to be fully hedged or protected?
  • For what length of time do you want the protection in place?

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE