Option Trading Tips for Anxious Investors: Try an Apple (NASDAQ:AAPL) Put
By Schaeffer's Investment Research Oct 01, 2012 10:20 am
Expert tips, tricks, and strategies to protect your portfolio.
Tip No. 5: ... but let the (spread) buyer beware when hedging with two legs.
- Of course, there's a lot to be said for "keeping it simple, stupid" -- particularly if you're concerned the Four Horsemen of the Apocalypse may trot down Wall Street at any given moment. Our Founder and CEO, Bernie Schaeffer, explains how put-spread hedgers can inadvertently cut themselves off at the knees, all in the name of saving a few dimes' worth of premium.
- Or, more specifically, the "fear index, " which is formally known as the CBOE Market Volatility Index (^VIX). Before you can begin to interpret VIX moves, you need to understand what it's measuring, how the index is calculated, and -- most importantly -- exactly what those VIX options are based on. (Hint: It's not the spot VIX.)
- Now that you know the VIX often moves inversely to the broader S&P 500 Index (INDEXSP:.INX), it might not shock you to learn that VIX calls are sometimes used to hedge long equity holdings. This strategy may actually be ideal for the looming apocalypse, as VIX calls tend to benefit the most when stocks are plunging (as opposing to meandering steadily lower).
- Let an expert from the Chicago Board Options Exchange (or CBOE) show you how to hedge with VIX calls.
No positions in stocks mentioned.