With markets so uncertain, and so bearish as they’ve been lately, it’s imperative that traders know how to hedge their long positions with short positions.
Shorting stocks, however, is risky. You expose yourself to unlimited risk and limited gain. On top of that, you generally need a lot of capital to short stocks in the first place.
But with options, you can gain short exposure with limited risk… All without needing tens of thousands of dollars in your margin account balance.
Right now, AK and I both believe you can make a ton of money trading call options in oversold bounces. That’s why he’s chiefly recommending them in Trade Kings…
But today in King’s Corner, I want to show you the best tools to hedge a portfolio of long call positions…
There are a ton of tools at your disposal to hedge all of your positions at once.
Specifically, I’m talking about ETF put options. Put options will rise in value as the market declines. So, you want to structures these trades around the broad market indices.
The main ones we use in the Trade Kings Live Trade Room are:
QQQ: This ETF follows the Nasdaq.
SPY: This ETF follows the S&P 500.
There are upsides and downsides to these two instruments. They’re easier to trade, but the put options can be more expensive.
To get around the higher prices of QQQ and SPY puts, there are many other cheaper ETFs we can use that don’t require as much capital, but can also move enough in a trading day to offset losses on long call positions.
Here are some great examples:
VIX: VIX increases as the market goes down, so call options can move quite a bit for a given down day.
VXX: This is a VIX ETF that has different dimensions and different theta decay than direct plays on VIX. Here too, call options will benefit as the market declines.
UVXY: Another VIX ETF with a different pricing scheme than VXX that gives it different dimensions and might better fit particular long call position combinations.
DOG: DOW Bear ETF that goes up when the market goes down.
SH: S&P 500 Bear ETF that goes up when the market goes down.
Now, we get to the leveraged Bear ETFs.
These instruments are levered, meaning as a percentage of their value, they move more than a regular bear ETF. This can juice the gains on options even more.
SPXU: Goes up at triple the speed when the market goes down.
SQQQ: Goes up at triple the speed when the market goes down.
This is merely a “shopping list” of instruments you can use to see the difference in price between each of them, as well as how much they move relative to the market.
In the Trade Kings Live Trade Room, I always have this watchlist up so our users can see how they’re doing.
A good place to start with these is to be positioned so that a third of total long positions are “hedged” by these instruments.
It’s important to experiment and learn for yourself the effects of leverage and various capital requirements for each specific instrument.
With some practice, a trader can “dial in” exactly the right amount of hedging they want to offset downside moves in the market!
Until next time,
Bryan Klindworth
Senior Analyst, Kings Corner