CC Lagator of Options AI joined Benzinga's Premarket Prep team this morning to discuss 2 ways to look at hedging your portfolio. You can watch the full interview on our YouTube channel BenzingaTV.
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00:00I mean, if you're really, you know, we're nervous nine days ago, now is the time to
00:04hedge the VIX has come back in, you know, options actually yesterday, it's falling
00:08today.
00:09But you know, yesterday would have been an excellent time to think about hedging, would
00:12have been an excellent time to think about maybe locking in some profits.
00:15But people don't think like that.
00:16They think, oh, gosh, I got to sell markets going down, I better sell, you know, markets
00:20going up, I better buy.
00:22I mean, and you know, markets going down, I better put on a hedging trade.
00:25That's just backwards.
00:26Yeah. And we talked about this last time, and we used Nvidia as an example.
00:31And I believe at the time Nvidia was like 125, let's say, right, or something around
00:36that. And, and it was what, 135 or something, you know, just before that.
00:42And we talked about like, how do you think about a hedge?
00:44There's a couple of and again, I think I said on that appearance, I was like, I don't
00:49often talk about hedges.
00:50I think they're generally a waste of money generally, when the market is boring, and
00:55you're doing a slow grind, it's a good way to like lose 5% a year, you know, of your
01:00gains, right?
01:01You give away most of it, if you're always hedging, you're going to make nothing in the
01:05markets. If you're continuously hedging, you will hedge away all of your long term
01:10profits, because if the market goes up 8-9% a year, I guarantee your hedges are going to
01:14cost you 8-9% a year and probably more.
01:16So the timing of the hedges, if you can time them well, you can be okay with it.
01:21But if you're constantly hedging your portfolio, you're going to make nothing.
01:24Yeah, and like why, and why be long the market if you're constantly worried, right?
01:28And so the way I like to think about those moments is, well, there's two ways I like to
01:34think about a hedge.
01:35Like, let's say you have a concentrated position.
01:37And you are worried that you will panic sell it, right?
01:42So imagine if you had made all this money in Nvidia, or you've made all this money, you
01:47know, there's all those moments in Tesla, Tesla makes those rallies, right?
01:50You just made a ton of money.
01:52And you're like, but then you know that Tesla and Nvidia have these habits of having 30%
01:57drawdowns or whatever, right?
01:59And you're like, what would it look like you have to kind of you, you think of the worst
02:05and you're like, how can I actually turn lemons into lemonade if that happened, right?
02:10And so you take a concentrated position, you've made a bunch of money in a stock, and
02:14you're like, how do I make sure that I don't panic puke it when the market's down 7% in a
02:19week, right?
02:20And then the other way to think about it is, where would I buy this stock if it went
02:25lower, right?
02:26And I think that's what we used as Nvidia as the example last time was, if Nvidia got
02:31down to, I think we were using at that point, like 105 or something, right?
02:36Or 110, it got down to 90, right?
02:38That day, um, it's like, where would I buy Nvidia?
02:42And what can I do so that I actually follow through with that idea, right?
02:46And what ends up happening on a day like last Monday is everybody's like, Oh, my God,
02:51if Nvidia came back to 110, I'd be such a buyer.
02:54And then it's 90.
02:55And they're not a buyer, right?
02:58And so you do, you do, you do options positioning so that A, you can sleep at
03:03night, B, you can, you know, you can, you're not like, wait, you're not panic puking on
03:09days like that.
03:09And the other one is to set yourself up for success, right?
03:13It's like, on those days when there's blood on the streets, I want to be a buyer of those
03:18stocks, not a panic seller.
03:20And so that's the way I think of hedges.
03:22It's like, I don't want to constantly have them on.
03:24But there's moments and I would say, like, we were talking about hedges.
03:28It's also the bullet, like you all were talking, and I have the same reaction is like, I
03:32think this is kind of overdone right now this rally.
03:36I'm scared to buy a stock, but then you pull up a chart, like, you know, pull up any of
03:41those mega cap companies that are shy of their highs.
03:43You're like, those could easily go back to those highs, right?
03:46And if that's the case, I don't want to stick my head out here.
03:51So what do I do?
03:52And it's like, you buy a pulse spread or something.
03:55You risk as little amount of money in a Microsoft chart right now to go back to those
04:00all time highs. And you go out like you go out to the end of the year or even January or
04:05something, right? And you're like, all right, if I'm completely wrong and I look like an
04:09idiot and this this whole 8% bounce we just saw was like a total trap.
04:15You know, I only I only waste this much money on a call spread or something.
04:19So that's the other way to use options is like when you're like a hesitant bull, right?
04:24And you're like, you're not willing to go completely all in.
04:28And it's like, how do I position for because right now I think we're all kind of looking at
04:32this and we're going, this could at least go sideways for a while, if not pull back a little
04:36bit. But we might be wrong if I rip it, everybody's so off sides that it could just keep
04:43going higher. Right.
04:44Which would be crazy, but it could happen.