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That’s how hedge fund managers do it. It’s really a smarter way to manage a portfolio of stocks, by beta-weighting them – using the Analysis tab – against an index like the QQQs. Then, determining the number of puts that you want to buy on the QQQs in order to hedge your position.
Now, I picked the 48s. The strike price is just about at the money here, but you can also go deeper in the money, if you wanted a little bit more protection. Of course, it is going to cost you a little bit more, so if you wanted a little bit more protection, you could go up to the 50s. That will give you a little bit more protection. Or you could use the 49s.
It’s really up to you, how much protection you actually want. If you want to get totally Delta-neutral, all you have to do is play around with the strike prices. You get down to 15 or 20 Deltas, you’re pretty close to Delta-neutral here.
My suggestion is to be a little bit long Delta, maybe 15 or 20, rather than short Delta. You want the stocks to move up. That’s why you bought them in the first place. You can play around with the strike prices and the number of contracts any way that you want, in order to determine the amount of risk that you have.
The longer the Delta, the less risk you’ll have on the downside. But that is totally up to you. Whatever is acceptable to you.
That’s how I manage a portfolio of stocks using the indexes. I think it’s a smarter way to trade. Also, this is the way to build real wealth, especially if we’re in a bull market on stocks. At this time, it’s questionable, whether or not we’re going to have a bull market in the stocks. The market is actually going down quite a bit.
If we take a look at the quick chart – I don’t want to time this, but we’ve come down pretty heavily, over the last 6 to 8 months. It’s questionable, whether or not we’re in a bull market. This type of strategy can be used at any time. It can be used when the market is up, to prevent yourself from a downside draft that could wipe out a lot of the profit that you might have in a stock.
If you already have a portfolio of stocks, and you’re not hedging those stocks with put options, or if you’re not hedging a portfolio that you might have, I think that’s a mistake. You could wipe out a good deal of any profits that you may have on that. Also, you’re losing an opportunity to purchase insurance on your portfolio, and then cashing that in later, if we do have a big down draft in the market, losing a lot of the Dow gains, or the S&P 500, or the NASDAQ.
This is a very smart way to trade. This is something that you can do on any existing portfolio stocks, not just the stocks that you have. All you have to do is take your portfolio, bring them over to the Analyze tab, and beta-weight this against any index. Let’s take the S&P 500, for a second. We’re going to beta-weight this against the S&P 500.
I’m going to take these QQQs out. I’m going to go over to the Trade tab, and bring out the SPYs. Let’s say we buy the at the money $1.36 puts here. Let’s bring that over to the Analyze tab.
We still have our stock position. What happens when we buy one of these? It brings our Delta from 148 down to 98. We might have to buy two of those, before we feel comfortable. We can also play around with the strike price. We can bring it down to $135, or bring it up to $136.
By playing with the individual positions, and taking a look at your Delta, you would want to be a little bit long Delta, to capture some of the potential profits in the stock, as it moves up. You should be doing the purchase of your stocks anyway. If you are slightly bullish – it’s always better to be slightly bullish, when you’re buying stocks. If you’re not bullish, maybe you should stay out of the market, until you feel like you’re bullish.
If you want to bring in your stocks and portfolio-weight them, you can weight them against the SPY, like we did here. Two would be a nice little hedge against any downside risk in your portfolio. You can do it against anything. You can do it against the SPY ETFs. You can do it against the QQQs, like we did before. You can do it against the DIAs. If you have a number of stocks that are portfolio and already compromised of Dow Industrial stocks, you might want to use the DIAs as a hedge. Use the DIAs in order to hedge your position.
The options are quite unlimited. That’s how you hedge your positions. That’s how you make money in the stocks. It’s a terrific way to limit your downside. It’s an absolutely dynamic way to trade. It gives you unlimited upside potential on any stock that you might own. It limits your downside risk to those stocks.
In fact, the way I’ve told you to trade is to use that insurance policy by buying those puts, and when the stock goes down, you cash in that insurance policy to buy more insurance, at a lower price. Also, you can use the excess cash that you generated, in order to buy additional shares of stock.
Eventually – I gave you an example of one particular trade that had an initial investment of $14,000. What happened was that the stock continued to go down, and then it went up, and then down again. Eventually, a 1000 share position turned into a 4000 share position, because of all the insurance that I was able to cash in, by cashing in the puts. Then, eventually, there was a large rally in the stock. It turned into a $75,000 position, from a $14,000 position, with absolutely no additional investment necessary.
That was in Nvidia. It was a terrific ride. It was up, it was down. You cashed in your puts. This is pretty interesting. Let’s say you purchased 1000 shares at $20. If you go back to some of these periods here, you had some pretty dramatic price movements. You could have cashed in those puts that you had, to buy additional protection, and then buy more puts.
When you cashed in those puts, you bought more shares, at the same time. Starting at 1000 shares, you could have cashed in some puts here. You could have bought a couple of hundred shares, and bought some more puts, cashed in here, bought a few hundred shares, bought some more puts, cashed in here, bought some more puts – cashed in some more puts, from your previous purchase, and bought more shares. Eventually, by the time you get to this point, instead of 1000 shares, you have 3000 shares. You have this huge run up here, where you make an absolute ton of money.
That’s how you build wealth, and you build it very quickly in the markets, by doing exactly this type of trading.
That’s it for this part. Trade with confidence.