One of the most important things a smart investor can do to remain successful is to have a solid risk-management strategy. In the stock market, hedging is one of the most effective ways to offset the amount of money investors lose… but do you know how to hedge stocks for free?
Hedging is like a form of insurance that protects your portfolio from risk. By also buying the opposite position of the same stock, investors are able to protect themselves if the stock market turns against them.
But what if I told you I found a way to hedge and trade stocks at almost no cost to you?
In this video, I’m covering how you can hedge basically for free — you can’t forget there’s always going to be some sort of risk and cost involved in trading.
I had this question come up a couple of times in my live trading room yesterday morning… So, as promised, I made a quick video on the easiest ways to do it.
One method I like to use to get a net debit/credit of zero is the bearish risk-reversal strategy.
When used for hedging, a bearish risk reversal strategy is able to limit the risk of a short position on a stock or option.
The strategy involves selling an on-the-money (OTM) put option and buying the OTM call option of the same stock. This allows traders to hedge a short position without having to pay the upfront premium cost.
This also creates a nearly zero-cost trade, or a “costless collar” — a hedge wrapping strategy used to protect against huge losses by buying/selling call and put options so they end up cancelling each other out.
The reason why investors call this strategy a “risk reversal” is because it reverses the risk of volatility skew. Basically, puts usually have a higher implied volatility — which means they cost more money to buy. So by selling the more expensive put and buying the lower implied volatility call, the volatility skew risk can be reversed.
With this theory, you could essentially start trading options for free…
And to show you how it’s done in practice, I’m going to take a look at the SPY March 5 call options and sell the 390 calls. Then I’m going to collect the upfront option premium and simultaneously buy the 396 calls — they have the same expiration date but a higher strike price.
From there you’ll be able to witness how I use the premium I gained off of this trade to finance my next.
Check out the video below to see how you can trade and hedge for free. As always, leave your thoughts in the comment section below and don’t forget to subscribe to my YouTube channel to stay up to date with all things options trading.
P.S. A former hedge fund manager turned “people’s trader” recently clocked out of a 53% ROI trade in under 24 hours…
But now he’s hunting a much bigger game.
We’re not talking about 100% or even 1,000% returns… but the chance to grab gains like 3,833% on some of the world’s smallest stocks.
This is like buying a future Fortune 500 company while it’s still trading at a small-cap price. In other words, few investors ever get an opportunity like this.
But you’re about to get yours.