A Wealth of Common Sense: Hedging Your Portfolio With Options

Market volatility has been on the rise. The past few months has seen stocks trade sideways overall. Most investors hope to buy low, grab an uptrend, and sell high. However, markets don’t always work that way.

That’s why it’s important to have tools that can help hedge your portfolio. Following a big run higher, a stock may need to trade sideways or pullback before the trend continues. That could be an optimal time for a hedging strategy.

The simplest strategy is to use covered call options. An investor can sell one call option on a stock for every 100 shares they own. That’s what makes the trade “covered.”

By selling a call option, a trader is willing to sell their shares at a set price in advance.

Say a stock rallies from $10 to $15 quickly but then slows down. A trader can earn extra capital by selling, say, a $16 call option from the trade.

While it’s not quite the same as earning a dividend, it can add extra income simply from owning a position.

Traders should look to sell covered calls after a stock has had a big move higher. That should translate into higher call option premium. Since option premium always goes to zero, selling calls after a big run gives traders a slight edge.

To listen to the full strategy for hedging your portfolio, click here.