The brokers earn money on transactions and so they encourage you to trade too big and make more money when you cut losses on a big move down. Why not turn lemons into lemonade? Why not trade small and Dollar average down when an unexpected event drops the market. The alternative is to get long Bonds which pay you interest while you wait for a liquidity event. If you want lower risk bonds then keep your duration short term. Portfolio rebalance on liquidity event.
I get you Stymie... no hedge is without cost including broker's vig.. But there are certain situations when you need to hedge and not just move to cash .. for example. if I am afraid of market event in short term like ships heading out into the Koreas, I am not sure I can call my 529 college fund admin and tell them to move my kids college $$ to cash for next 1 month ..( I really should research that) ..
I have the feeling you're asking the wrong question. What I think you're saying is you want maximum exposure to a bull market without the requisite exposure to a bear market. What I hear is you've poorly managed risk. That's a good way to gloat to me about your thousands percent gains and turn despondent when it became a $0 balance. My entire time investing and trading has been spent trying to answer this question. The short answer...the most effective way is not to. By which I mean, don't leave profits on the table during good times, and be ready to tolerate bad times (by sensible risk management). Basic risk management type stuff--don't over leverage, diversify, don't assume risk you can't tolerate...You can control risk, you cannot control reward. So many people on here sing the praises of compounding trading gains--but the flip side to that is you're now exposed to losing not only your original trading account balance, but also the gains. I address this by only leaving 20% of my gains in my account plus the float I hold for taxes (until 12/30...then I harvest interest on it until 4/15). The remaining 35-40%, I move over into my investment account and make prudent investments. If I have a big loser that wipes out my account, I'm usually still have a net gain for the year and I just stop trading until I have the cash to fund it again (I never move investment gains into my trading account). One of my biggest (and most expensive) lessons was position sizing. I try to keep my position size consistent throughout the year, and use gains for additional positions of similar size (see how this hits directly on diversity, risk tolerance, and compounding?). It's only when I add cash into the account (usually November of December) that I'll increase position size for the following year to match my diversity requirements. Finally, I keep my positions relatively balanced with at least 1 long put position (10-15% of account value, usually), at least 1 long call position (again 10-15%), and the remaining 70-80% in bear-neutral or bull-neutral positions (read: credit spreads). That way, when it hits the fan, the long put usually goes way ITM and subsidizes some or all of the losses across the other positions. Even if every single one of my trading account positions moves against me in the worst possible way, I'm never exposed more than about 60% of account value. I find beer to be a nice hedge against a bad day in the market.
Except that the exact opposite thing happened the last 2 times I was watching in real time. Both after Brexit election results, and after the Trump win, the ES hit limit down at -5% and stopped trading for 10-15 mins. Then, when it resumes, major rally!!! Don't get me wrong, I wouldn't want to be holding anything either, but there certainly wasn't any panic selling when it resumed, but more like panic buying.
I was not advocating use stops on the extended hours trading - just saying the down side on the ETH is locked down at 5% on the ES. I never use stops on the ETH. However, I always use stops on the regular session. The point was the days of the huge gap downs no longer exist on the stock indexes. A lot of people are afraid of the overnight which is ironic since the largest gains are made in the ETH post 2008. The ETH has all the gains with the lowest pain. The ETH curbs are 5%, the RTH curbs are 7/13/20% before the curbs kick in, your highest risk is in the regular day session.
If the market is truly efficient, a perfect hedging against any risks should consume the exact profits from taking those risks. We know some markets are not all that efficient, but still it's pretty rare that money get left on the table.
The most effective way is to self-insure, ie pay no money for protection because a) how often does a Black Swan occur, and b) tell me when the last one was? And please don't say the swiss debacle as that was about as far way from a Black Swan as could be. It was therefore a White Swan.
If you already have a large gain, you can do a no cost collar to protect your gain. But the cost is your future gains will be limited.
There is in fact significant skew in index OTM puts so it's even more expensive to hedge a swan than it otherwise would be.