My Opinion On Hedging Using Put Options

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38 Comments

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  1. Hi Sven, thanks for your valuable insights! Would you sell then put option to increase your income and to open position at the price you want? Many value investors are obviously selling put options. I would like to hear your opinion about this. Hvala puno!

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    2. You are forgetting that when you sell a put, you are taking the risk from the other part. It is one thing to invest in companies you consider undervalued, and another is to sell insurance and get a prime for it. You need to decide what you want to be.

  2. Hey Sven, I’ve seen other similar comments, what about selling put options to generate income while waiting for the stock price to fall to where you desire?

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  3. I don’t consider it to be a hedge, but selling covered calls on your own shares is an effective way to generate income regardless of the environment, but specially in times of high volatility.
    When the market is on an uptrend: let it rise 4-5% and SLOWLY start selling 1-month out-of-the money calls without special events inside the window. Shares would have to continue rising and stay high in order for your shares to be called, and even if they were, you would be selling overextended shares that are due for a pullback, so you can buy them back if interested.
    When the market is on a downtrend, wait for it to reject technical levels during retracements and do the same thing.
    It is a robotic process and you should be okay with whatever outcome.

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  4. Hi Sven, Thanks for the video. What do you think about covered calls or puts? I think it’s a great way to buy a company for the right price and waiting to do so pays premium(puts) and sell covered calls for price you want to sell that company and collect premium for waiting for that price. Thanks in advance

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  5. Hey doc, put options are not used as a hedge in most cases. Warren Buffet uses put options to accumulate shares, and not as a hedge. Basically, once a stock price approaches (but not quite) ones perceived margin of safety, an investor can take advantage of the premium that comes with that volatility. It’s a win-win scenario. Assuming a close strike price with about a 4% return over 30-45 days. If the price stays the same….win 4%. If the price drops below the strike price, then you just accumulated shares at a 4% discount…win. If the price goes up, you still get your 4% for that time frame. Note: This technique works best in an account where short term gains are not taxed. (IRA/Roth/etc.)

    1. @Brian Batts Not entirely the case, certainly frequently. A lot of professional and institutional investors will sell call options at a strike providing hefty profit, then use the subsequent premium to buy put options, thereby providing a hedge for free. I actually do this with the portfolio I manage, as well as other people who are my peers. I would not expect retail investors to consistently do this though.

    2. @Piotr P Yep, you can. For example…today MU is at $50.44. If you sold a put 3 FEB 23 (42 days) at the $50 strike, you’d make 5%. And you’d make more premium if the IV was higher that 50%. Right now, it is only 43%.

  6. IMO options are only good for actually betting on movement of volatility (and you strongly believe the expected change in volatility is not already priced in..)

    By the way, I don’t know if you’ll read this, but you recently did a video on bonds/stocks/RE when retiring. Now I’m a young student that is about to graduate with a masters. I have no debts and around 10k in the stock market. All around me people always recommend getting a loan and buying a house as soon as you can. But those people aren’t investors and have no understanding of the stock market (they view it like I view crypto..). However, getting a mortgage and buying a house, means getting a loan, essentially providing you with a huge amount of leverage. An amount of leverage that you should never use in the stock market (for obvious reasons..).

    What is your opinion on this? Should a young person prioritize buying their first house/appartment or just keep pouring everything into stocks?

    Also, what is your opinion on using margin/leverage to buy stocks. I have a margin account, but have so far never used it to buy stocks. Margin could potentially greatly amplify returns, but too much leverage leads to margin calls and giant losses. I want to know what an acceptable amount of margin/leverage is when value-investing (or if it is none and why)

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  7. Sell puts, dont buy them. To get you into a stock at a better price. Sell puts and then when your into a stock, sell calls against it. It’s a win-win

  8. 🗽Hedging ist always a timing/speculation…. if you want to sell your stocks later, you could use it to fix the price now. But it makes not much sense, if you hold your stocks long term!
    .

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  9. Thank you for this short video.
    Concise and clear for me! Instead of wasting time and energy on options. I will stay focused on buying opportunities.
    Volatility doesn’t affect me anymore thanks to you.
    It is an opportunity.

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  10. Not to mention the time spent on the daily to try to find right prices in the options trading. This is simply for people who have nothing else to do….

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  11. Hey, Sven, you might wanna check your microphone settings. The sound is very low. Btw, thanks for the video, as always <3

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  12. I’m using options to buy stocks at the price I want, if that price gets hit: I sell puts and get paid to wait for the price I want to buy. If it gets hit, very well, I keep the stock and the money I get for selling puts. If not, I just sold some puts. It’s a win-win if not greedy and with a little bit of patience.
    Of course it requires a little more money than usual.
    One can also sell calls, if the market goes up and you know for sure that you want to sell something at a certain price.

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