This depends on which put you purcahse and if you sell calls to offset the put price which is what many professionals do. This is called a collar. As the QQQQ index is at roughly $44 this means it protects $4,400 worht of portfolio. I would maybe pick an index like the MNX instead that is trading for $177. One put protects $17,700 in stock, so you will only need 5 or 6 puts instead of 23 contracts of the QQQQ. Then simply pick something out of the money depending on how much protection you want. The put will be exspensive which is why most people sell calls (the collar). because of margin you will have to sell the call in the stock instead of the index. You may want to buy a book on this and get caught up.
Thank you all for your advice and thank you Delta (in particular) for your pictured walkthrough. My thinking behind wanting to hedge my long side bet here is that I don't pretend to know where the market (in general) is headed, however I do feel that the companies in my long-only portfolio are good ones and I believe that they will outperform the market whether it goes up or down (hopefully, I'm not being too optimistic). I could choose to hedge by simply shorting the QQQQ here, but that would require alot more capital (and/or leverage) than I would like to dedicate to it. For this reason, it was my assumption that buying QQQQ puts would be the cheapest way to provide adequate portfolio protection against a market that frankly looks a little tired to me currently. Do you thinking my thinking is flawed here, or that I should consider approaching this a different way?
The book I bought was trading in the OEX pit for 7 yrs. It actually was better then a book. A book is NOT REALITY. A Collar in theory makes for good classroom discussion. The reality of the collar is the number of decisions you have to make. What Put to Buy , how far out in time, commissions, getting a good execution, does it really protect my portfolio? I have found in most cases, after hedging with collars and covered calls, the BEST HEDGE IS TO CUT YOUR RISK EXPOSURE WITH CASH. If you are really concerned with MARKET RISK, then cut your Stock Allocation back to a comfortable level. The Market God made Options for trading. The Exchanges want the Public to look at options for hrdging to increase their order flow. The BEST TRADERS know how to SELL OPTIONS and operste as a Bank. The Public will Buy the books and try to use Options in a conservative way with Hedging, Spreading, Butterflies, Collars, etc. Try to get good prices for thes positions against a Specialist as an individual trader. Good Luck with your reading!
Although there are a few similarities, selling options is much different than how a bank operates. My guess is that more traders who sell options go out of business than banks who loan money.
The reference to a Bank is to the size of a pro traders account and the effective use of size. The highest failure rate for beginning options traders are those who BUY OPTIONS. The success in SELLING OPTIONS is selling 3wks before expiration- the sweet spot in premium erosion. This has nothing to do with making loans.
With the VIX in single digits, I am buying JAN 08 OEX puts. Look at the 560 or 540 lines if you want to lock in some long term gains and give your self some wiggle room. I also have a large cushion of cash getting paid at 5%. This pays for the premium effectively collaring the portfolio to a degree. Instead of buying QQQQ puts, look at the QID. It is 2X short the QQQQ. Use some cash in this and it works like in the money puts.
i just discovered recently the quid and looks a great alternative to selling short etfs and futs. double the bang for your buck as well compared to a traditional sale of qqqq.
Thank you, Bitstream. It would appear from the general tone of everyone's responses here, perhaps I would be best off taking your advice and looking into the QID.
hello semper, Am looking for a hedge myself for my trading stock portfolio. Not that I`m afraid as people call it, but hasnt got every prudent home owner an insurance policy? Without buying/selling something outright, wouldnt it be more cost-effective to have a stop buy order or stop sell order in place on an instrument, so that you only have to have the deposit in your account for placing that order? So the market drops down and it`ll hit your stop and you buy or sell your instrument and it will generate a profit when the market drops further and protects your portfolio against the losses. So you only have the protection, when the market is actually falling. Good or what?!?
After speaking with several people and garnering alot of feedback, I decided upon a relatively simple hedging formula which isn't perfect, but has worked pretty well for me over the past several months. Simply put, I keep a QID hedge on at all times that's worth rough 1/3 the value of my overall long portfolio. Since the QID is x2 the normal inverse of the QQQQ and the QQQQ tends to fluctuate more (ie. magnified volatility) with the ups and downs of the market, I've found the 1/3 ratio to be optimal. The bottom line for me is that I am much more confident in my ability to pick stocks that will outperform the market than I am in my ability to time the market in general. I find this approach to be very effective for me, especially considering the instability that I feel the market is headed for. Without the hedge, I don't think I'd feel safe enough to maintain a long portfolio in this climate. It just seems like everything is overvalued right now.