Howdy folks,
If you’ve been in the markets long enough, you know one thing for sure: they don’t always cooperate with your plans.
Whether it’s a surprise economic report, a sudden geopolitical event, or just plain ol’ market volatility, there are times when the markets can throw a curveball. That’s where hedging comes in.
Today, I want to talk about hedging strategies — specifically using options like SPY puts — to protect your portfolio and keep you in the game when the market moves against you.
What Is Hedging?
At its core, hedging is like buying insurance for your portfolio.
Let’s say you’re long on a bunch of stocks and the market suddenly takes a dive. Without a hedge, your portfolio takes the full brunt of that drop. But if you have a hedge in place, you’ve got a safety net that can help offset those losses.
One of the simplest ways to hedge is by buying put options.
Why Use Puts to Hedge?
A put option gives you the right (but not the obligation) to sell an asset at a specific price within a set timeframe. Think of it like locking in a price floor for your stocks.
Here’s an example:
|
| • | | You own a portfolio of S&P 500 stocks. |
|
| • | | You buy SPY puts (SPY is the ETF that tracks the S&P 500). |
|
| • | | If the market falls, the value of those puts increases, offsetting some or all of the losses in your portfolio. |
It’s a simple yet powerful tool to reduce your risk without having to sell your stocks.
When Should You Hedge?
Hedging isn’t something you need to do all the time, but there are certain situations where it makes sense:
|
| • | | Market Uncertainty:
If there’s a big economic report, earnings season, or geopolitical tension on the horizon, a hedge can give you peace of mind. |
|
| • | | Taking Time Off:
Heading out on vacation? Want to spend less time watching the market? Hedging can let you step away without worrying about sudden moves. |
|
| • | | Protecting Big Gains:
If your portfolio has had a strong run, a hedge can lock in those gains while still leaving room for further upside. |
How to Hedge with SPY Puts
Here’s a simple step-by-step guide to using SPY puts:
|
| • | | Determine Your Exposure:
Figure out how much of your portfolio is tied to the S&P 500. For example, if you’ve got $100,000 invested in large-cap stocks, you’ll want a hedge that matches this value. |
|
| • | | Choose the Right Put:
Look for SPY put options with a strike price near the current SPY value and an expiration date 30–90 days out. |
|
| • | | Calculate the Hedge Size:
Each SPY option represents 100 shares of SPY. So if SPY is trading at $400, one contract protects $40,000. In this case, you’d buy 2-3 contracts to hedge a $100,000 portfolio. |
|
| • | | Set It and Monitor:
Once your hedge is in place, keep an eye on how it’s performing. If the market drops, your puts should gain value. If the market rises, you’ll lose the premium you paid for the puts — but your portfolio will increase in value, balancing things out. |
The Benefits of Hedging
The biggest benefit of hedging is peace of mind.
No one can predict the future, and even the best traders get caught off guard. A hedge lets you stay in the game without being glued to your screen, worrying about what the market might do next.
Think of it this way: Hedging isn’t about avoiding risk altogether. It’s about managing risk so that one bad move doesn’t take you out of the game.
Final Thoughts
Hedging might sound like a complex strategy, but it’s actually one of the simplest and most effective ways to protect your portfolio.
Whether you’re navigating market uncertainty, taking some time off, or just wanting a little extra security, buying SPY puts is a great place to start.
And remember, the market will always have its ups and downs. The key is staying prepared so that you can weather the storms and keep your trading journey on track.
Until next time,
— Geof Smith
P.S. With Trump back in office, nuclear power is back in focus — and uranium could make big moves in 2025. Don’t miss my FREE session where I share exactly how I plan to play it! Catch it here now!
No comments:
Post a Comment