Hedging stock market risk with options

From the perspective of market options, if the entire market has a relatively large decline, or the current market has entered a relatively large and long-term adjustment. When adjusting, if you want to hold stocks and reduce volatility, you usually need to take option hedging.

put hedge

Putting hedging on the stocks you own has the advantage that the trend of the options can correspond to the respective stocks. This kind of protection effect is the best. At the same time, you can adjust the hedging method according to the different trends of the stocks. For example, some stocks are relatively strong in the later stage of adjustment. Then we can remove the hedge early in the later stage, so the upside will not be limited. Conversely, some stock adjustments are weaker than the performance of the broader market, so the hedging time can be extended to prevent a larger decline. The disadvantage of this approach is that it is costly, and it is necessary to judge the trend of each stock before thinking about how to Adjustment, this is a very troublesome process.

overall hedging

Choose to use the market index put option to hedge your portfolio against the whole. This advantage lies in the low cost, and at the same time, some securities companies provide the parameters of the investment portfolio and the Delta value of the corresponding stock market index. In this way, it is possible to roughly estimate the impact of the market’s drop in points on the investment portfolio. It can give us a direction, roughly how much hedging to buy. But this approach is equivalent to giving up the flexibility to make hedging adjustments to individual stocks, and this approach also has no way to hedge the decline caused by major changes in the fundamentals of a certain stock.

The above two types of hedging have their own advantages and disadvantages, and each trader should make a corresponding choice according to his actual situation.