Hedging is a complex topic, nearly impossible to cover all its nuances in a forum. People hedge for various reasons, and there isn’t a universally “correct” approach —it ultimately depends on your own goals and risk tolerance.
For me, hedging serves two primary purposes:
To mitigate losses in core positions during a market downturn.To provide the confidence to hold core positions instead of selling shares.
Of these, the second goal is more important to me. My investment style focuses on identifying companies with long-term growth potential and holding through market ups and downs. However, human emotions often lead to impulsive decisions (e.g., selling shares like PLTR when it feels overpriced at $50). Hedging works for me as a safeguard against these emotional reactions
One common hedging method is using put options, though there are other strategies available. To reduce the cost of buying puts, sometimes, put spread could be used. An example is the recent QQQ trade with a 25 point put spread with a cost of $4–$5 per share. This translates to a 1% premium to protect against a 25-point drop in QQQ (say, from 540 to 515). For a hypothetical portfolio of $1M in QQQ, the cost of the premium would be $10K. If QQQ continues to drop below 515, the put spread can be rolled lower to a new spread (e.g., 515/490). Also, you dont have to protect the entire porfolio, you could, for instance, only cover 3/4 of the position, which would also reduce the premium cost.
In a rare case you're not familiar with puts or put spreads, you could look up online. ChatGPT offers detailed explanations to help understand these concepts.
The timing of purchasing a hedge is important. Randomly buying put hedges can unnecessarily increase the cost basis of your shares. I think a good understanding of TA, particularly in analyzing market trends, is essential for effectively implementing a hedging strategy. I try to focus the timing of hedge when there are strong signals suggesting the market is overextended and at risk of a correction. For instance, this applied to QQQ at 530–540, PLTR at 70-80, or as Tesla getting close to 500 (I have shared detailed analysis about these price range before). The TA foundation for me in identifyinf market trend is mainly based on Elliott Wave Theory (it’s too complex to dive into details of that here) but there are many others TA tools people use
I’ve been on the wrong side of hedging trades many times. However, even with a 50/50 success rate, hedging can be profitable overall. When wrong, the loss is limited to the premium paid. When correct, the downside protection can be substantial. By coupling hedging with strong technical analysis, you can potentially improve that 50/50 chance to a slight more favorable odds. By "profit," I don’t mean protecting 100% of the portfolio. Instead, the benefit lies in reducing potential drawdowns and avoiding the need to sell shares (which would incur taxes).
As mentioned earlier, this last thing, the confidence to hold core positions and avoid the need to sell shares is the biggest benefit of hedging. When I feel tempted to sell shares, my first thought is, "Why not hedge instead?" If I’m correct, I gain some downside protection. If I’m wrong, I’ve merely paid a small premium while retaining the opportunity to benefit from future gains (e.g., holding PLTR from $50 to $80 instead of selling prematurely at $50). This, by the way, is the entire raitonal behind the mindset of being prepared for a market top but not attempting to picking a top and selling shares. Keep in mind, the possibility for you to being wrong on hedge trade is a: stock goes up which is a good thing overall, or b: stock stays flat which is not so good as you waste premium but, hey, take it as a good overall outcome as that means your main porfolio is untouched. Again, good TA indicators can help in getting better odds at those timing.
I would say if market fluctuations is not a concern for you, and you’re not interested in taking advantge of large trend reversals, then hedging might not be necessary.
BTW， here is a strategy that is "always better" than selling
Let's say you have decided to sell the shares and about to pull the trigger (for example, PLTR is at 75 now and you just can't see it go any higher).
Instead of selling PLTR at 75, you can literally buy ATM put which is likely to be expensive, let's say it costs you $8 to enter a put hedge.
Then you wait for a day or 2, and one of 2 things will almost certain take place
1: PLTR going down as you have expected, in this case, your put hedge instantly become profitable
or
2: PLTR goes up from 75 to 80. While you have a loss on your put at this point, you can sell covered call for strike price of 80, which is likely also $8 (because PLTR price has gone up)
From now on, if PLTR continues to rise, your covered call will evenutally be called away, but at price of 80, so you are eseentially selling your shares at 80. If PLTR turn around and crash, your put will still protect you, but since you have sold covered call, your premium on the put is 0.
In either case, it is better than selling shares at 75 outright.
Hedging is a complex topic, nearly impossible to cover all its nuances in a forum. People hedge for various reasons, and there isn’t a universally “correct” approach —it ultimately depends on your own goals and risk tolerance.
For me, hedging serves two primary purposes:
To mitigate losses in core positions during a market downturn. To provide the confidence to hold core positions instead of selling shares.Of these, the second goal is more important to me. My investment style focuses on identifying companies with long-term growth potential and holding through market ups and downs. However, human emotions often lead to impulsive decisions (e.g., selling shares like PLTR when it feels overpriced at $50). Hedging works for me as a safeguard against these emotional reactions
One common hedging method is using put options, though there are other strategies available. To reduce the cost of buying puts, sometimes, put spread could be used. An example is the recent QQQ trade with a 25 point put spread with a cost of $4–$5 per share. This translates to a 1% premium to protect against a 25-point drop in QQQ (say, from 540 to 515). For a hypothetical portfolio of $1M in QQQ, the cost of the premium would be $10K. If QQQ continues to drop below 515, the put spread can be rolled lower to a new spread (e.g., 515/490). Also, you dont have to protect the entire porfolio, you could, for instance, only cover 3/4 of the position, which would also reduce the premium cost.
In a rare case you're not familiar with puts or put spreads, you could look up online. ChatGPT offers detailed explanations to help understand these concepts.
The timing of purchasing a hedge is important. Randomly buying put hedges can unnecessarily increase the cost basis of your shares. I think a good understanding of TA, particularly in analyzing market trends, is essential for effectively implementing a hedging strategy. I try to focus the timing of hedge when there are strong signals suggesting the market is overextended and at risk of a correction. For instance, this applied to QQQ at 530–540, PLTR at 70-80, or as Tesla getting close to 500 (I have shared detailed analysis about these price range before). The TA foundation for me in identifyinf market trend is mainly based on Elliott Wave Theory (it’s too complex to dive into details of that here) but there are many others TA tools people use
I’ve been on the wrong side of hedging trades many times. However, even with a 50/50 success rate, hedging can be profitable overall. When wrong, the loss is limited to the premium paid. When correct, the downside protection can be substantial. By coupling hedging with strong technical analysis, you can potentially improve that 50/50 chance to a slight more favorable odds. By "profit," I don’t mean protecting 100% of the portfolio. Instead, the benefit lies in reducing potential drawdowns and avoiding the need to sell shares (which would incur taxes).
As mentioned earlier, this last thing, the confidence to hold core positions and avoid the need to sell shares is the biggest benefit of hedging. When I feel tempted to sell shares, my first thought is, "Why not hedge instead?" If I’m correct, I gain some downside protection. If I’m wrong, I’ve merely paid a small premium while retaining the opportunity to benefit from future gains (e.g., holding PLTR from $50 to $80 instead of selling prematurely at $50). This, by the way, is the entire raitonal behind the mindset of being prepared for a market top but not attempting to picking a top and selling shares. Keep in mind, the possibility for you to being wrong on hedge trade is a: stock goes up which is a good thing overall, or b: stock stays flat which is not so good as you waste premium but, hey, take it as a good overall outcome as that means your main porfolio is untouched. Again, good TA indicators can help in getting better odds at those timing.
I would say if market fluctuations is not a concern for you, and you’re not interested in taking advantge of large trend reversals, then hedging might not be necessary.
truly focus and learn...... but hedging with puts is important
我买的一年费用两千多。功能不多，功能更多的更贵。主要用途就是帮我计算期权。我可以上载我的股票。然后设定要保护多少仓位，在那个时间段内需要保护。它可以算出最佳期权组合。但是不能直接下单。能直接下单的服务太贵。我除了保护一般不做期权。所以只买了最基本的功能。然后按照它的建议自己下单。
仓位过大的时候自己计算太麻烦。但是做个股还是必须有这层保护。不然一是可能短期损失过大，二是心理脆弱拿不住。有这层保护就是为了能长期持有还不吃短亏。
三心还是好人。耐心解释。我绝对没这个耐心。说完也不讨好还被质疑。完全没必要。
TA 不可能总是对，但可以提高Hedge 的概率
见色起意。我那弟妹咋就不让你跪搓板呢？是不是没好的？我可以送个不锈钢地。哈哈
TSLA 在接近480-500 区间已经远远超过normal Fibs extension level， 所以它在2个星期内要不就冲600， 要不就回调400
can't make the horse to drink.
Let's say you have decided to sell the shares and about to pull the trigger (for example, PLTR is at 75 now and you just can't see it go any higher).
Instead of selling PLTR at 75, you can literally buy ATM put which is likely to be expensive, let's say it costs you $8 to enter a put hedge.
Then you wait for a day or 2, and one of 2 things will almost certain take place
1: PLTR going down as you have expected, in this case, your put hedge instantly become profitable
or
2: PLTR goes up from 75 to 80. While you have a loss on your put at this point, you can sell covered call for strike price of 80, which is likely also $8 (because PLTR price has gone up)
From now on, if PLTR continues to rise, your covered call will evenutally be called away, but at price of 80, so you are eseentially selling your shares at 80. If PLTR turn around and crash, your put will still protect you, but since you have sold covered call, your premium on the put is 0.
In either case, it is better than selling shares at 75 outright.
被领导抓去打泡菜球刚刚回来就看到您的帖子，非常感动。先谢谢
仔细读了您的解释，理解了您的构想和具体操作。感觉可行。
以前在大盘下跌，眼看着账户在缩水，只能采取在下跌过程中不断加仓，没有采取保护，也不知道怎么保护。
以后试着用您的策略和方法，先用少量资金操作。正像您说的，不可能保护全部，小部分也好。以后熟练掌握hedge技巧再加大资金。
TA俺没有问题，也有耐心。这些年通过跟踪大盘chart,在每次大盘下跌过程中积攒了很多大盘指数，象2009，2019，2020，2022年
希望在未来大盘下跌过程中有能力加保护
也希望以后能从您这里学到更多投资知识和技能
谢谢您在休假还费心码了这么多字
祝节日愉快