The strategy focuses on developing a zero-loss, high-profit options hedging strategy with three main components: the protective put, collar, and strangle strategies. The protective put strategy involves purchasing put options to hedge against stock price declines, ensuring losses are capped while reviewing options markets for cost management. For example, if you hold a stock valued at $100, buying a put option with a $100 strike price acts as an insurance policy should the stock fall.
The collar strategy involves buying put options and selling call options simultaneously to protect the stock and control costs. An example would be owning a stock and wanting to cap potential losses without incurring high costs, so you sell a call to offset the put's cost. Finally, the strangle strategy is ideal for volatile stocks, involving buying both call and put options at different strike prices to profit from significant price swings. This approach assumes potential high profits with limited investment risk.
The strategies
⛳️ Strategy 1: Implement the protective put strategy
- Identify the stock or portfolio you want to hedge
- Purchase an equivalent amount of put options for the stock at a strike price close to the current stock price
- Choose an expiration date for the put options that aligns with your investment timeline
- Calculate the potential losses to ensure they are capped by the protection provided by the puts
- Analyse historical stock performance to set realistic profit expectations
- Keep an eye on option premiums to manage costs effectively
- Review the option market regularly and adjust your position as needed
- Develop a plan to roll over the options if the expiration date approaches with unfavourable stock price movement
- Evaluate early exercise of the options if the stock approaches the strike price suddenly
- Monitor market indicators and adjust the strategy as per changing economic conditions
⛳️ Strategy 2: Utilise collar strategy for hedging
- Identify the stock holding you wish to protect
- Buy put options for each stock you plan to hedge
- Sell call options at a higher strike price than the purchased put options
- Select expiration dates that fit your investment duration for both put and call options
- Calculate the net cost to ensure minimal expense by considering premiums spent and earned
- Establish target exit points for the stock's performance to guide your selling decisions
- Regularly assess volatility in the market to adjust strike prices if necessary
- Research and choose stocks with relatively stable price history for implementation
- Maintain a proper record of transaction costs associated with option trades
- Assess the strategy execution before the expiry and decide on rolling over or closing positions
⛳️ Strategy 3: Employ strangle strategy with risk management
- Choose a volatile stock or asset suitable for this strategy
- Purchase out-of-the-money call and put options with the same expiration date
- Set different strike prices for the call and put options, both out-of-the-money
- Analyse past price movements to determine potential future volatility
- Determine the maximum loss (limited to premiums paid) and potential profit (theoretically unlimited)
- Keep an eye on market events that could cause significant price swings
- Set alerts for price movement nearing the strike prices to promptly decide on exercising the options
- Allocate specific capital to this strategy to prevent over-investment and manage risk
- Evaluate the strategy toward expiration and consider selling or buying offsetting positions
- Document and analyse the outcome of each execution for continuous improvement
Bringing accountability to your strategy
It's one thing to have a plan, it's another to stick to it. We hope that the examples above will help you get started with your own strategy, but we also know that it's easy to get lost in the day-to-day effort.
That's why we built Tability: to help you track your progress, keep your team aligned, and make sure you're always moving in the right direction.
Give it a try and see how it can help you bring accountability to your strategy.
