The 6-Week Options Trading Kickstarter: Hedging, Portfolio Protection, and Avoiding Disaster
Steve Smith discusses using options to protect your positions and portfolio.
3. Finally, use the proceeds of the call spreads to buy some out-of-the-money (or OTM) puts outright to provide deeper downside protection. For example, the $7,000 proceeds from the call spread would finance the purchase of about 20 of the January $117 puts. These OTM puts give you outright disaster protection should the market head back towards last October's lows near the $110 level.
The total outlay would be about $11,000 -- or about 7% of the $150,000 portfolio -- which isn't too steep for over six months of portfolio insurance.
This is just a loose construct -- you can play around with the numbers -- but I think the best hedges will ultimately involve more than simply picking one strike.
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