HOW TO HEDGE
WHAT IS HEDGING?
A HEDGE IS AN INVESTMENT THAT IS MADE WITH THE INTENTION OF REDUCING THE
RISK OF ADVERSE PRICE MOVEMENTS IN AN ASSET. NORMALLY, A HEDGE CONSISTS
OF TAKING AN OFFSETTING OR OPPOSITE POSITION IN A RELATED SECURITY
(INVESTOPEDIA)
HOW I HEDGE FOR FREE
TO PUT IT SIMPLY I BUY EQUITY SHORT CALLS AND BUY PUTS WITH THAT MONEY
LET'S TAKE A REAL LIFE EXAMPLE
I BOUGHT $PLTR SHARES AT 19.90 ON DEC 31
I SHORTED SEPT 16 CALLS FOR 2.26
I BOUGHT $20 MARCH PUTS FOR $2.48 ( PAID .22 CENTS ALMOST FREE)
LET'S ASSUME ITS MARCH 18
$PLTR IS AT $10
$PLTR PUTS ARE AT $10
$PLTR CALLS ARE AT $0.05
I BUY BACK BY CALLS FOR $0.05
I EXERCISE MY PUTS AND SELL $PLTR AT 20
THE MATH ( PROFIT & LOSS)
SHARE P/L + $0.10
OPTION P/L - $0.27
TOTAL PROFIT / LOSS = - 0.17 CENTS PER SHARE
WITH THIS MY TOTAL LOSS FOR THE TRADE WAS 0.85% WITHOUT THIS I WOULD BE
DOWN 50%
IF I BOUGHT 10,000 $PLTR SHARES
WITH THIS STRATEGY DOWN = $1,700
WITHOUT THIS DOWN = $100,000
MAIN ADVANTE
CAPPED LOSSES & "FREE" HEDGING
MAIN DISADVANTAGE
YOU CAP YOUR UPSIDE AS YOU SHORT THE CALL
TLDR: BUY COMMONS, SHORT CALLS AND USE THAT MONEY TO BUY PUTS.