Skip to content

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market

In the ever-evolving landscape of the financial markets, volatility is a constant companion. As investors, we often seek ways to mitigate risks and protect our portfolios from sudden market downturns. With TD Ameritrade closing its services for retail investors and Tiger Brokers offering improved commissions on options, this might be a good time to start looking at using options to help hedge your portfolio. Two effective strategies to achieve this are selling a covered call and buying a put option. In this article, we’ll explore these two simple yet powerful option strategies that can help hedge your portfolio against the unpredictable movements of the market.

If you want to maximize profits in 2024 and prepare your portfolio for any possible volatility, check out my Premium Subscription! Get access to my personal watchlists, trades I'm excecuting as well as market updates almost every day! To kick off the new year, we will be offering trials for a limited time only. Contact me here to find out more.

Disclaimer: This article is written in collaboration with Tiger Brokers Singapore. All views expressed in the article are the independent opinions of sgstockmarketinvestor. This article is intended for information purposes only and should not be construed as financial advice. This article has not been reviewed by the Monetary Authority of Singapore.

Understanding the Covered Call

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Understanding the Covered Call

A covered call is an options strategy that involves selling call options on a stock you already own. It’s a strategy that generates income while providing some downside protection. Do keep in mind that by selling the call option, you have an obligation to sell your shares at the chosen strike price if the option buyer chooses to exercise the option.

How it helps to hedge your portfolio

Generating Income: By selling covered calls, you receive a premium from the option buyer. This premium provides an immediate source of income, which can act as a buffer during market downturns. In a volatile market, when stock prices may be swinging wildly, this income can help offset potential losses in your portfolio.

Downside Protection: While you have sold the call option, you still own the underlying stock. If the market becomes extremely bearish, the premium received from selling the call partially cushions the impact of the stock’s decline. In essence, it lowers your effective purchase price for the stock, providing some downside protection.

Reduced Volatility Risk: Volatile markets often result in higher implied volatility, which increases the premiums of options. This means you can potentially earn more significant premiums for the call options you sell during volatile periods, enhancing your income potential.

How to execute this?

First, find the stock that you want to buy a put on.

Then, under Trade, locate the Options section.

Under the Options tab, you can find the various strike prices as well as expiration dates.

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Understanding the Covered Call | How to execute this?

Assuming we want to sell at this given strike price, we can simply sell the call option and place a sell order.

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Understanding the Covered Call | How to execute this?

Once the order has been filled, you have successfully opened up a covered call option.

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Understanding the Covered Call | How to execute this?


Let’s assume that I previously bought 100 AAPL shares @ 170.00. For the example above, I sold 1 AAPL Call Option with Strike 185.00 & expiry on 20/10/2023. AAPL’s market price was around USD 178. Assuming that the order is filled at USD 0.38, I will pocket USD38 premium! Now there can be 3 very general scenarios that can happen on 20/10/2023:

1) AAPL closes above 185.00 (above strike price)
The call option gets exercised and I have to deliver my APPL shares. I get to keep the USD 38 premium and the proceeds of USD 18,500.

2) AAPL closes at 175.00 (above my purchase price but below strike price)
The call options expire worthless. I get to keep my shares and the premium of USD38!

3) AAPL closes at 165.00 (below my purchase price)
The call options expire worthless. I get to keep my shares and the premium of USD38. The loss here will be $5 share loss – $0.38 premium = $4.68 per share.

As you can see from above, while earning a premium, I get the chance to enjoy some upsides and have my downside protected to some extent!

Understanding Buying a Put Option

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Understanding Buying a Put Option

Buying a put option is a more straightforward approach to hedging against market volatility. It’s essentially a form of insurance for your portfolio. By owning the put option, you have the right, but not the obligation, to sell your shares at the strike price until the option’s expiration date. If the stock’s price falls below the strike price, the put option becomes more valuable and can help offset losses in your portfolio.

How it helps to hedge your portfolio

Defined Downside Protection: When you buy a put option, you secure the right to sell your shares at a predetermined strike price. In a volatile market, where prices can plummet suddenly, this strategy provides you with a clear and predefined level of protection for your portfolio.

Peace of Mind: Volatility can be nerve-wracking for investors, leading to impulsive decisions. Having a put option in place gives you peace of mind, knowing that even if the market takes a nosedive, you have the option to limit your losses by selling your shares at the strike price. This mental assurance can help you stay disciplined during turbulent times.

Leverage in Downward Markets: If the market experiences a sharp downturn, the value of the put option tends to increase. This can offset losses in your portfolio, effectively acting as insurance. It’s particularly beneficial when you hold significant positions in stocks that are vulnerable to market volatility.

How to execute this?

First, find the stock that you want to buy a put on.

Then, under Trade, locate the Options section.

Under the Options tab, you can find the various strike prices as well as expiration dates.

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Understanding Buying a Put Option | How to execute this?

Assuming we want to sell at this given strike price, we can simply buy the put option and place a buy order.

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Understanding Buying a Put Option | How to execute this?

Once the order has been filled, you have successfully opened up a put option.

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Understanding Buying a Put Option | How to execute this?

Trade Options with Tiger Brokers

2 Simple Option Strategies To Hedge Your Portfolio Against The Volatile Market | Trade Options with Tiger Brokers

Tiger Brokers has just slashed their option prices by over 75%! Previously, opening an options contract had a minimum commission charge of $2.98 per contract. Now, Tiger Brokers is offering no minimum commission charges on options trading with only a very small commission charge of $0.65 per contract!

Conclusion

In the unpredictable world of finance, it’s essential to have tools at your disposal to protect your investments. Selling a covered call and buying a put option are two simple yet effective strategies to hedge your portfolio against market volatility.

The covered call generates income while providing a buffer against potential losses in your stock holdings. It’s a way to monetize your existing positions. On the other hand, buying a put option acts as a safety net. It gives you the right to sell your shares at a predetermined price, providing peace of mind during turbulent market conditions.

Keep in mind that both strategies have associated risks and may not be suitable for all investors. It’s crucial to thoroughly understand the mechanics of these options and consider seeking advice from a financial professional before implementing them in your portfolio. With the right knowledge and strategy, you can navigate the volatile market waters with confidence and resilience.

As always, you can take a look at my portfolio updates to see my current positions! P.S. I’m running a telegram chat group for you guys to share and discuss investment-related topics so come on in! I’ll be there too! You can join the chat here: https://t.me/+Qe-eykvtbEowNDM1

Are you new to the stock market and don’t know what you should do to avoid losing half your portfolio through bad picks? Or perhaps you are an experienced investor/trader looking for fantastic opportunities and picks in the market that you might have missed out on?

If so, look no further because I am running a Premium Subscription that offers services such as:

  1. Access to both my Singapore and US Tech Watchlist with Preferred Entry Prices
  2. Telegram Group Invitation Where I Share Market Updates and My Personal Views
  3. Monthly Tradable Opportunities with Trade Setups
  4. On-Demand In-Depth Fundamental and Technical Analysis on Any Stock of Your Choosing
  5. Coverage on Several Basic and Advanced Options Strategies

Affiliate Links and Reviews

Brokerage

uSMART: Referral code nylw5n or (https://m.usmartsg.com/promo/overseas/sg-register.html?langType=3&HCode=nylw5n#/marketing-register)
Tiger Brokers: Referral code SGSTOCKM or (https://www.tigerbrokers.com.sg/signup?invite=SGSTOCKM&group_id=CG4000000231&f=BCS&region=SGP&lang=en_US)

Investment Tools

StocksCafe: Looking For An Online Portfolio Tracker? Use StocksCafe!
TIKR: TIKR, The 1 Stop Platform To Do All Your Stock Market Research On

Leave a Reply

Your email address will not be published. Required fields are marked *