This Options Hedge Has a Cool Feature

[@mattbella12]

This was very informative in understanding how to hedge with put options! Now you have my interest in options! I'd rather trade equities or futures contracts for income or retirement but hedging with options is definitely something Ive been wanting to understand better for in the future when I am getting long large positions for multiple day swing trades! Thanks SMB!

[@paulb2093]

That was an interesting decision point when you sold the 3350 put. When you crystallised the $4K profit, you also left $24.43 ($101.39- $76.96) still in the trade with the prospect of it turning into $50. That’s pretty much a 50/50 risk. In the end it did go to max value so well done. I might have been a bit more risk averse and considered rolling the hedge spread down to, say a 3350/3300; or to also sell a further OTM put spread to condor the hedge; or to take off the hedge spread as it drew closer to expiry and it reached a high percentage of its maximum value (so as not to risk a lot for a little extra possible return). Thanks for sharing.

[@gracepolaris7839]

@5:00--in the 3rd bullet of this slide, should the word "seller" have been "buyer?" If not, this seems completely backward. Wouldn't the trader who shorted the put have to PAY $2,000? Not receive $2,000. Or did you mean the original "buyer" is now selling this option for $2,000 now that it is profitable?

[@brianquigley6862]

Excellent concept. Of course using this amazingly timed cherry picked trade helps to illustrate the strategy, but this strategy does become useful even when wrong. If the mkt never drops, the long PUT loses value but even with the mkt flat to up a bit one can still sell a put below the long to reduce loss and stay in the hedged position longer and with less to lose. This will allow the hedge to play out longer. Of course max profits will be reduced but the concept is still a very good one. Open the long PUT, assess the MKT and place the short where ever necessary to manage the LONG. I really like this technique bc it allows me to be less reluctant to open a Long Put to hedge whenever I deem it necessary!

[@gianluca1971100]

interesting, thanks. one question: why do not you should close the deal (selling 3400 put at 101.39) instead of selling a put lower? you would get 6500 USD in a while... perhaps better than selling a lower put (a bear put spread) with a minimum of 4000 usd and max 9.000.

[@MrAwindy]

Thanks for the nice lesson. Have you looked at the pros and cons of having stops on the different trade segments? For example placing a stop 25 pts below the entry point on the 3350 puts sold would have cut the loss on those puts roughly in half resulting in final hedge settlement of 9860-2430-3630+7696=$11,496.

[@jotgill5174]

Is it possible to roll out the index options to next month expiry on the day of expiration? Let me know, thanks!

[@jonathanranes5733]

So essentially legging into a debit spread?

[@peter8454]

exactly, what it is. nicely told story, though.

[@intanineke1776]

Such a great idea... will practice and try this strategy. Thanks, Seth !

[@smbcapital]

you got it!

[@yasirali709]

Nice work!

[@DaltonGrados]

Awesome strategy! Thank you!

[@smbcapital]

thx Dalton!

[@terrellp22]

I can't wait until I actually have time to sit down, break down & learn this stuff

[@grantgre]

Is this a debit put spread?

[@Touchfootballer27]

It could be structured that way but the profit potential would be lower by then. It seems that the long put of 3400 & short put of 3350 was placed separately

[@henrybarnard644]

intriguing

[@kihljason]

Something doesn’t seem right about this example. Once you sell the 3350 put, you create a vertical spread in which your profit potential is capped. Because at that point the 3400 long put and the 3350 short put would be locked dollar for dollar below 3350. To double check this, I even went through the Thinkback feature in thinkorswim and tried to re-create it and I can still only come up with the $4000 profit.

[@paulb2093]

Its a $4K realised profit once they sold the 3350 put against the 3400 long put. That leaves a free 3400/3350 long put spread in place (because cost of the original 3400 put has already been fully offset by the 3350 put sale). That 3400/3350 put spread then went to its maximum value of $5K (i.e. 1ct. x 50 wide spread x 100 options per ct.) bringing the total realised profit on the trade to the $9K mark. Hope this helps.

[@kihljason]

So would the trade have been limited to just the $5K if the long and short put transactions had happened simultaneously?

[@paulb2093]

Great question. If a 3400/3350 bearish spread had been opened, the maximum value 1 contract of that spread could attain would be $5K (1 x 50 x 100). This would occur at option expiry. But the profit on such a spread would be $5K minus the price paid to open the position. Their trade was able to achieve a $9K profit because the two legs of the spread were entered separately and the market moved down substantially in between the trades.

[@sethfreudberg4750]

@@paulb2093 @Jason--what Paul said :). You said it PERFECTLY Paul.

[@sethfreudberg4750]

@@kihljason No please read above.

[@grantgre]

I got lost when he started talking about the promotional video with the three strategies that distracted me and got lost maybe we shouldn’t have to put our advertisements right in the middle of our educational video.

[@danielwestereng155]

im obviously joking. thanks for the videos as always

[@vishka07]

the markets can remain irrational longer than you can remain solvent.” John Maynard Keynes