plowe32 said:
I'm still learning. If you speak super technical, I may not understand. Regarding hedging, do you guys buy QQQ puts or buy something like SH? If you buy puts what percentage are you hedging of your positions and how far out generally speaking?
This is probably not something for this general thread - maybe start a new post so as to not derail the discussion here, but, in general ...
Understand your purpose and tax situation. If it's pre-tax money, most of the below info is fair game. If post-tax, realize that you will owe taxes on either or both of the capital gain/loss in any underlying stock, along with ordinary gains/losses on any options results.
My basic approach, honed over 25+ years, is to select a single current appreciated position that has recently run up, is showing a lot of volatility (which boosts the premiums on options), and "hedge" if you have near-term uncertainty in direction of price movement. Something like PLTR, TSLA, RDDT, WWR , or other recent high-flyers. NOTE: You have to be willing to let the stock position go (along with the tax impact), so choose carefully, and maybe consider only "hedging" a portion of your position. Once the stock has been identified, there are two primary paths I choose from:
1)
Sell a covered call. I typically go 3-6 months out for expirations, and sell a call (strike price) for 15-30% out of the money. You collect the premium, and if the price declines, or appreciates less than the strike price, you simply pocket the premium as ordinary gains. You can do this repeatedly, which enhances your gain over time. If the price ends up above your strike price, you give up the stock AT THE STRIKE PRICE (taking a capital gain), pocketing the additional premium as ordinary income. Then, you're free to reinvest the money in something else.
2)
Buy a protective put. Same principle, in reverse. If I'm worried that TSLA or PLTR will take a dive, thus eating into my long-term capital gain on the position, I can buy a put for well below the current price (usually at least 15-30% lower, for me). I look at this as pure insurance. If disaster happens (TSLA loses half its' value, for example), I can sell it for a higher-than-market-price, and hopefully retain a gain on the position. If it doesn't, I've just paid a premium for peace-of-mind, and consider it money well-spent (if your risk-averse level of worry is high enough).
There are spots where I'm conflicted on which approach is better, but I try to make covered calls work first (once you understand the mechanics, they're quite a conservative investing approach), before embarking on the insurance approach with a protective put. I'm fortunate enough to have quite a few long-term winners to employ these tactics with, so I'm able to goose my returns by judiciously applying them, repeatedly. You can also "roll" the options to gain more time for your strategy to work, at a cost. Of course, my core philosophy is still to buy and hold high-quality companies with great returns and market potential and share, and watch them grow over decades. This is in addition to broad-market ETFs like SPY, QQQ, etc. for
most of my portfolio.
I think several of the traders here employ stops to limit downside risk, and that's another straightforward risk-management approach. I don't use it much, because when a stock declines rapidly, you don't always catch the price you want, if there are no buyers at that price. For example, if TSLA is $400, and drops to $300 based on overnight news, you may not get your $380 stop executed - there may not be bidders/buyers until $325-330, thus taking control of sale timing out of your hands. BUT, it's widely and effectively used, so I'll let others chime in on that.
This is off the top of my head, so read or employ at your own risk - don't take action until you understand the risks.
