Why I hedge

First off, your probably thinking why am I talking about a bush in an Options Trading group. Well I'm not. A hedge in the financial world is basically protection in case the market goes the wrong way that my position is in. For example, let's say I'm long 300 shares of SPY which as of close on Friday May 15th is worth $85,884.00. Now with the run the market has been on, you don't want to add anymore shares and you feel like the market could go down a bit or a lot depending on how you're looking at the market overall right now. 

So you think the market's going to go down. You can buy puts on SPY, but those tend to be pretty expensive and you have limited cash available. Well you can buy a butterfly put spread with strikes of 260/255/250 on SPY with a June 19th expiration date for 0.14. That's a max profit of $486 per butterfly. Remember a typical butterfly is you buy one of the first strike, sell two  of the middle strike and buy one of the way out of the money strike. The goal of this to negate the effects of the market going the opposite way that your position is. It's a way to control exposure and manage risk. You can hedge with UVXY call butterflies as well but the liquidity is much better on SPY. The reason I hedge my long positions is because if even one of these hedges hit's max profit, it saves my portfolio, it helps negate the bleeding when the market tumbles. If just one hit's during the year, and that's the only one that saves me, it makes it worth it in my case.  It's up to you to figure out how much you want to spend and potentially lose on hedges. 

Disclosures: I am currently long a June 19,2020 50/55/60 UVXY call butterfly. This is not intended to be investment advice. For entertainment purposes only, please do your own due diligence before investing. I have no position in the above stock(SPY).

Option Basics: Definition, Call Option, Put Option, Strike Price

Stock Option - An option is a contract where one person sells an option, that person is known as the option writer who then sells it to an option buyer, referred to as the option holder. The buyer of the option now has the right but does not have to buy (call) or sell (put) the security at the strike price, which was agreed to when the seller sold the option to the buyer. The option may be exercised during the time specified in the contract. Each option represents 100 shares of the underlying security. Mini options represent 10 shares of the underlying securities but are only available on AAPL, AMZN, SPY, and SPX.

Call Option - When a buyer acquires a call option, which is a contract where the buyer can but is not obligated to buy the underlying at a defined price within a certain amount of time. When a call option is bought, the buyer expects the price of the underlying to increase, and the call option will increase in value as the underlying increases.

Put Option - When a buyer acquires a put option, which is a contract where the buyer can but is not obligated to sell the underlying at a defined price within a certain amount of time. When a put option is bought, the buyer expects the price of the underlying to decrease and the put option will increase in value as the underlying decreases.

Strike Price - A strike price is the price where an option buyer can exercise the contract. When using call options, the strike price is where the buyer can buy the security regardless of where the security is trading currently When using put options, the strike price is where the buyer of the option can sell the specified security regardless of where the security is trading currently.

Welcome to Options Traders

Welcome to the Options Traders blog. This site will serve as an educational platform for new and experienced traders alike. Options Traders is a Facebook group which consists of option traders from around the world, who collaborate, share ideas, offer constructive criticism and trades. This site will include many options strategies, examples, descriptions and trades that members have placed. We focus on equities with good liquidity and never in OTC or penny stocks. Please remember that investing and trading can lead to loss of capital or more when using a margin account. The writers of this blog are not responsible for losses, this site is for educational purposes only and is not to be considered as investing advice. Do your own due diligence if you follow one of the members trades, no one is responsible for decisions you make. Thanks for reading and happy trading!