A question I regularly receive that doesn’t have a one size fits all answer. After all hedging is about minimizing risk, so it is dependent on how much every individual trader wants to risk/de-risk as market conditions/setups change.
So why would you hedge? Why not just close out position 1 instead of opening position 2 to balance out position 1’s risk? Lots of reason here:
1) Say for example, you have been holding an asset for almost a year and you want to avoid selling it to qualify for long term capital tax gain instead of short term. Hedging allows you to hold the asset position but reduce risk against you.
2) You just aren’t sure which way the markets will go…. in fact a lot of pros use a delta neutral strategy in which they have no direction and are just collecting option premiums from theta
3) With the right setups and a bit of luck, you could win both ways
So lets look at what options you have to hedge…
For those who only trade shares:
1) If long on certain tickers, there could be a corresponding bear sector etf that could be taken as a hedge. For example, SQQQ is a leveraged bear etf on QQQ.
2) VXX and other volatility trackers can be a good hedge for an abrupt downside market move.
3) Take an opposing trade (a short position) on a sector that normally performs differently from the position you are trying to hedge. Take for example, XLP (consumer staples) which normally performs better in a recession compared to other sectors. So how do you know which sectors are correlated with each or move opposite of each other? Check out the diagram attached – courtesy of TastyWorks.
4) This is a step into options as if you own 100 shares of a stock you can sell covered calls against your position (collect premium) or take protective puts (guarantee a minimum sell price) as a hedge as well.
For those who trade options:
1) Same rules apply as for shares but with options in addition to the following:
2) You can do a calendar spread or diagonal spread against your long position. The short dated option will get burnt up faster and you have time for your longer position to recover.
3) You can always take a shorter dated trade opposing your original trade to profit off the shorter term move. For example having leap calls, but expecting markets to pullback over a few days after a large run. Keep the leap calls to preserve long bullish position but take a small amount of short dated puts to profit off of the potential short term downside move. Trading this way is more for psychological management of positions as closing and re-entering positions can often result in overtrading and not entering at optimal prices as our brain is wired to think of the trade from the last price point we traded it at rather than the actual chart setup.
4) Create a paired trade with tickers in opposing sectors. (refer to diagram below again)
@everyone this one is about what I consider the only indicator we really need. It needs a little prep work but once you start using it, you’ll probably never go back to anything else. It starts with a little explanation on how we played TSLA above and I add 4 other examples from today’s charts. Let me know if this helps. This is what I work with all the time.
First I was bullish on the day and on TSLA. News from semi’s in possible production and later news from the fact that they could earn more money with software subscriptions than selling cars, GS also bullish ahead of earnings, Cramer saying the little e-pony from F could be the only real competition to TSLA… Real competition means that for now, TSLA is a solo leader. Long story short, I was bullish.
Look at the comments in chart below showing where I entered and why.
I also shows in the other chart where I decided to add, finding strong support.
Decay was vicious. Almost felt like they didn’t want to pay for the rise, making sure to lower the value of the pump as much as possible. This would mean that market could be rigged so it couldn’t be…
Let me know if the info provided in the charts are enough for you to see/learn) understand what I’m trying to share. I hope this helps.
@everyone This one is about intraday same day expiration scalps. It covers where to look for a bottom and why we pick specific strikes. Today we managed quick in and out plays, twice. Have a look. Maybe you’ll see what other traders are looking at.
SCALING OUT OF YOUR TRADE AND TRAILING YOUR STOP
My rule of thumb is to let the stock go up about ⅓ of the total Profit Target and lock in about ⅓ of your position size in profits. At this point it’s best to move up your Stop-Loss (SL) to your entry point.
From this moment on, your trade becomes Risk-Free and that is the goal of every trade.
If the price keeps moving in your favor and the price reaches ⅔ of the way to the Profit Target, lock in another ⅓ of your position size in profits. Keep moving up your Stop-Loss, this time to your first Take-Profit level which was ⅓ of the total Profit Target.
If the stock moves to the final Profit Target the remaining position is sold to close out the trade.
Always use a stop loss to prevent the stock from falling below the expected risk level on every trade.
TRADING EXIT STRATEGY
An exit strategy is all about risk management. Traders who just let their profits run can ultimately suffer major losses. You must have an exit strategy to not only lock in profits and cap losses, but also remove any emotional influence from your decision-making process.