How To Use Options Like A PRO (Hedge Fund Strategy)

ladies and gentlemen welcome back to your new favorite finance youtube channel this is pandrea finance my name is alex pandrea and i'm very excited to bring to you today's video today we are talking about how we can use options to hedge our positions protect your butt basically from a potential market downturn nobody likes those so you gotta protect yourself this is something every investor and trader needs to know and once you understand the concept and what strategy works for you it'll open up a whole new world of ideas and at the end of the day you'll lose less money which i think is a good thing so is losing money worse than not making money now i've been fortunate enough to be on the inside of some of these hedge funds and investment firms so i've gotten to see a lot of these professional strategies at work first hand and this is what you will learn today a professional no bs approach to options this video is going to be broken up into three sections three ways that we can use and trade certain options depending on what you want to accomplish and at the end of this video i'm going to give you a very important bonus tip bonus strategy that when i learned it it changed the way that i looked at investments so do watch until the end of the video for that before we get started make sure to hit that like button helps the channel a lot i do appreciate it we're growing really fast it's very exciting so hit the like button and subscribe and do everything that you got to do and if you're ready then so am i let's get into it the first thing we have to understand is what is hedging now you probably heard the term get tossed around here and there you obviously have heard of hedge funds but what does it mean to hedge hedging can basically be defined as reducing risk in your investments you are buying an insurance policy on your investment or portfolio just in case that trade or investment goes against you your profits are locked in or you are covering your losses so if you're long a stock for example you buy into a stock and you're holding it for the long run hoping that the price goes up on the stock and all of a sudden the stock just tanks it crashes and you're like i don't know what to do if you would have hedged your position those losses would be minimized or wiped out completely and even in some cases you could actually make money on your hedge and end up being profitable overall in the trade but the basic idea is that you decide that you want to go for less profit potential but ensuring less loss at the same time which goes back to my original question is losing money worse than not making money now depending on what you're invested in and your investment strategy you might have different hedging strategies to go along with your investments so let's go through some of them right now now one of the most straightforward and easiest hedges that one might think of would be to use a stop loss in your trades to well stop losses so say you buy a stock at 50 and then it shoots up to 75 bucks well now you're pretty happy you're in the profit you're dancing around but you're still a little nervous because what if it falls back down as stocks sometimes do they go up they go down well you might be inclined to use a stop loss in your trade by placing that stop loss maybe at 70 dollars so that means that if the stock does come back down from 75 and hits 70 your trade will automatically execute and you'll sell those shares at 70 locking in that profit now this is all fine and dandy but there are just a few cons that i'd like to talk about when using a stop loss first of all you're not guaranteed that that stop loss will execute for example if that stock goes from 75 and then overnight has a gap down going down past your stop loss well it's not guaranteed that your stop-loss will execute so you're kind of out of luck on that one also if your stop-loss is executed then you're forced to sell i mean obviously thanks there's some good content on this channel no but hear me out you're forced to sell so say it goes from 75 and then it touches 70 and then it goes back up to 72 75 77 and then you're like no wait i didn't mean it i don't want to sell take it back not to mention there's a lot of market manipulation that is tied in with stop losses see hedge funds and big institutions they have access to see where the majority and concentration of those stop losses are in a certain company and what do they do well they try to trigger those stop losses by shorting the company the company's stock will go down your stop loss will be executed the stock keeps going down and they buy in at a lower price which is kind of like the opposite of a short squeeze relatively rare but i figured i should mention it so now you're asking yourself hey alex there's gotta be a better way to hedge our positions well fine i thought you'd never ask how can we use options to hedge our positions the first way is to buy a put on a company you own shares in already now let's say you buy stock or your long stock in your favorite company and you're holding shares for the long term hoping that the share price rises you make profit everything is good now let's say that stock has a huge run up in a short period of time you might think to yourself yikes this is a little bit overvalued now we can't be sustaining this price right guys well what do you do about it well here's the simple answer you're going to buy put option contracts in that company which will lock in profits in a different way than a stop loss would see when you buy a put option that gives the buyer the right to sell shares at a given strike price on or before the expiration date now this definition itself of what a put contract is locks in profit inherently in its definition it leaves room for the upside potential of the stock but it caps losses so if you were to buy a hundred shares of a given stock at fifty dollars let's say and the stock shoots up and now it's 75 what you now can do is buy one put contract on that investment say with a strike price of seventy dollars and that put contract will allow you to sell shares of that company at seventy dollars if it falls below seventy dollars so in essence you are capping your losses you are locking in profits and you know that even if that stock tanks down to 50 30 23 you have that right to sell shares at 70 so you're locking in profit right away with that put contract now again remember that one option contract controls 100 shares of the company so we have 100 shares we buy one put contract to even it out we have 200 shares that's two contracts so on and so forth you got it you guys are smart also another thing to keep in mind is depending on your expiration date your strike price of your option how far out of the money where in the money it is you can actually turn a profit on your put side of the trade so you don't even have to end up selling your shares which is great because we know how the stock market works something takes a dip and recovers so you make money on your put contract you sell that further you don't need to sell your shares your shares recover win-win all around and you make profit now i plan to make a lot of different videos on option strategies and all these intricate little details so do subscribe if you haven't already a lot more is to come all right now let's take a look at how we could use the same approach but for your overall portfolio see it's one thing to watch a particular stock go up and then you say to yourself there's something not right with that one but when the whole market goes up as a whole and it keeps going up and there's this crazy valuation and you haven't seen a dip in like forever begin to think to yourself hey we all just gotta calm down here okay so you wanna protect your overall portfolio you don't wanna sell out of your positions because you're invested for the long term you don't wanna pay taxes maybe you're collecting dividends now some might say hey if you're invested long term don't worry don't panic if there's a dip it'll recover don't do anything drastic but hey i say if you could be a little bit more active and make money along the way why not okay so what do we do well the strategy is very simple we're gonna buy put options just like we did on individual stocks but we're going to buy it on index funds broad market index funds to protect ourselves from the market downturn we are going to use index funds like the s p 500 or etfs that track the overall market buy puts on them and protect our so let's take a look at an example right now go ahead pull up your robin hood app or your favorite trading app and we're going to go check out the s p 500 in this case we're going to look at spy which is the etf that tracks the s p 500 so go ahead go to spy and take a look at the five year chart now you might look at this chart and think to yourself well there's no signs of slowing down but we all know how the market works don't we when we think one thing the market literally does the opposite so you might think for whatever reason there might be a correction coming so let's make pretend this is what we think oh well there's a correction coming so what do we do so we're gonna go ahead trade trade options on the smp and we're gonna go maybe three months out in the expiration date because maybe i'm bearish on the situation until the end of the year i think by the end of the year something's going to happen we're going to have a correction so we're going to try to represent that feeling in a trade so i'm going to go out to an expiration date let's say december 17th now the option chain will pop up and just make sure at the top you have buy and put selected you know it might be on buy call just make sure it's on buy put now a lot of the times it might be recommended to buy at the money puts so in this case we're looking at a strike price at 450 or 451 the closest ones to what the current price is and the reason for this is that if we're giving ourselves like three months for this downturn to happen it can still go up for a few months before we have that downturn so that's why maybe at the money would be best but for me something like a five percent out of the money strike price would be even better so we're going to scroll down and we're gonna see the two break even percentage that is underneath the strike price on the left you're gonna go down to maybe five percent so i'm going to keep going down and we see the 442 dollar puts the two break even percentage is negative five percent so the spy has to drop five percent for us to break even on the expiration date of course we can still make money before that and we're going to click on it and now we're going to decide how many contracts we want to buy to protect our portfolio now there is a formula you can use to determine how many contracts you need to fully hedge your portfolio i use a little bit of a cheat code here especially in robinhood it tells you the max profit on a trade and we're going to use that to our advantage to calculate how many contracts we need to protect our portfolio now you might have to turn on a few different settings depending on what brokerage you're using but a lot of them have the break-even points the max profit the max loss our max profit for this trade if we put in one contract is 42 815 now this means that if the spy crashes down to zero then we have a put contract worth forty two thousand eight hundred and fifteen dollars so the max profit shown on the trade should equal your portfolio balance to protect it one hundred percent so that means if the whole stock or the whole index goes to zero then you will be fully protected because your max profit will be equal to what you had in the portfolio of course the spy is not going to zero so we don't need to cover it a hundred percent and you'll see what i mean in just a second but for now one put contract will cover us if we had a portfolio of five thousand ten thousand three thousand forty two thousand eight hundred fifteen so in most cases one put contract on the spy will be enough to act like a good insurance policy for your position but if you have a larger portfolio you might need a few more contracts so let's calculate what would suffice for a larger portfolio let's jump into mine for example now as you can see my portfolio is about 1.4 1.5 million so we're going to try to protect that using protective puts on the spy so go ahead hit trade trade options and let's say we're going to go out to say the beginning of next year january 21st 2022 because maybe i feel like the market's going to take a little bit of a downturn before then i'm gonna make sure i have buy and put and i'm going to scroll down and find a good between five and ten percent for me is good and i'll go with the 440 puts now for me to cover my whole portfolio i would need to buy about 34 spy puts to cover everything you can see max profit here is 1.4 million that is of course if the spy just goes to zero which is not going to happen so like i said we're not going to fully hedge our portfolio i like to divide by three or four these amount of contracts and you'll see if i divide 34 by four we'd get eight point something which let's say nine so nine put contracts have a max profit of 381 dollars which is about a fourth of my portfolio and i am paying about fourteen thousand dollars of premium to protect my portfolio now you'll notice fourteen thousand dollars is about one percent of my whole portfolio so with one percent i can protect the downside of five or ten percent or who knows how much is going to dip now this obviously begs the question is if the market keeps going up and up past my expiration point and nothing happens then i would have lost my whole premium of the fourteen thousand dollars but it was one percent of my portfolio so you have to ask yourself is it worth taking that risk paying that premium to protect against the possible more than one percent drop and that's really for you to answer for yourself and for you to decide depending on the market conditions and how you feel about what's going to happen now of course you can't keep doing this over and over and keep buying protection for your portfolio at some point you're going to run out of cash run out of money and it just won't make sense because as your portfolio is going up you're eating into your profit by hedging your position all the time which leads me to my third creative way of hedging our positions selling calls and buying puts this is the caller strategy now we're getting a little bit more interesting with our plays like i said the problem that arises with the first two strategies that we talked about is you can't consistently do this and hopefully you could only be bearish for so long for certain periods of time can't be bearish all the time because then what are you doing so how do we find a way to keep hedging our positions if we so need to while not continuously putting up cash so here is the strategy you have a portfolio of stocks what we're going to do is we're going to sell call options on that portfolio of stocks by selling an option we're collecting a premium hoping that that stock does not reach that certain strike price now if the stock does not reach that strike price we keep that whole premium it's ours to do whatever we want with it so we have a company we're selling calls we're collecting premium and then what do we do with that premium that free money basically well guess what we do we go ahead and we use that money to buy puts on our position hedging with the money that we just took in see by adding this extra leg of this trade we are substituting the cash that we would have had to put up to using somebody else's money to ensure our positions not gonna lie it's pretty smart all right so how would this work well let's go in and find the company that we think might be overvalued i'm going to choose apple for this example now this is again just an example i'm not saying it's overvalued undervalued nothing about the company itself just so we can use it for this example let's say we already own 100 shares of apple and for whatever reason we think that it's going to go down this month next month in the near future we want to protect our 100 shares but we don't want to put up the cash for that protection so let's see how it's done we're going to click trade trade options and we're going to go out maybe one month out maybe earnings are coming up for the company or maybe you think apple's fall release will be a disappointment whatever the case may be we're going to go let's say one month out okay let's go to well let's go to the end of october october 22nd now at the top we're going to go sell and call so we're selling a call and let's just pick one for example 160 strike price all right so 160 go ahead put in one and you'll see that you are going to receive a credit of 273 now that credit is yours to do what you want right when you place that trade and get that order filled now on the other side let's x out of here and let's go to buy and then put at the top same same expiration date and we're gonna go down and choose the 149 dollar put okay so max cost if we put in one you'll see is 291 okay so it's about the same amount as the credit you're taking in from selling the call you're using to buy the put now in this particular case it's 20 more expensive but you understand the basic concepts so if we x out of here i'll show you how to actually combine these two legs into one trade you're going to go at the top right of the option chain and hit select now you might have to switch these options on in your trading brokerage account but this will allow you to do different legs at the same time in one trade so we're going to go ahead and again hit sell call for the first leg and go to the 160 strike price and select it all right so that's the first one selected now we're going to switch to buy on the top and put by put and we're going to buy the 149 put okay we're going to select these two options and hit on the bottom continue and this will bring up the two trades that we are making we are selling a call and we are buying a put and you'll notice that the two option prices almost cancel each other out in this case we'll have to pay 16 cents per contract if we want to make this trade and 16 cents is much cheaper than if you would have just bought that put contract at 2.89 and we're saving a lot of money doing so now of course this is just an example and we chose strike prices that are pretty close to at the money you can go further out you can go further in that's going to be depending on you but that is the way that we're doing it we're choosing two options they will hopefully cancel each other out with its price and you get a free insurance policy on your apple shares now keep in mind with the strategy like in all strategies there are downsides to everything in this case you are capping your losses because of the put that we have but we are also capping our upside potential our profit potential because we're selling that call and if our shares get called away from us then you are selling the shares at that strike price so you could only have a certain amount of profit now this might be okay for you because during this time period maybe again you think that the stock is going down so you are okay capping your profits to protect your losses for a short period of time in this case we did a month or two months or three months whatever you feel like doing so the decision will be yours on when to use a strategy like this and when not to it is time for my bonus strategy for today's video it's something so simple yet so effective and a lot of people don't know much about it and that is volatility how can we use volatility to hedge our positions now stick with me because it might sound complicated but it's really not the s p volatility is inversely tracked by something called the vix the vix is the volatility index now the vix is often referred to as the fear gauge because when fear is high volatility spikes up or the vix spikes up now let's pull up our trading app and search vxx this is going to track the volatility index of vxx and you'll see that the chart for the vix is inversely correlated with the chart of the spy so if we go to the spy and we look at its chart and then compare it to the vix chart it's basically a mirror image so how do we use this to our advantage protect our position and also maybe make a little bit of money well the answer is pretty simple we are going to buy out of the money calls on this volatility index if you think the market is going down and remember this whole video is about yeah i think maybe the market's going down so i'm gonna go trade trade options and i am going to go out to say the end of the year december or let's let's keep it simple let's go january 21st 2022 so by the end of this year beginning of next year i think the market's going to go down a bit again this is all speculation at this point and we're gonna go and buy the 30 calls so make sure buy and call is at the top and we're going to go with the 30 strike price and then you can go ahead buy your calls set up your insurance and you'll be good to go and this could help offset losses that you might have in your portfolio and you could even end up making money on those calls making a profit more than even your losses and your portfolio and when you sell those options at a profit then you can take that profit and buy back into the market at a lower price your calls are happy your portfolio is happy everybody's happy give yourself a round of applause you did it let me know down in the comments below what else you want me to teach you on this channel like and subscribe do all that stuff get the word of this channel out there we're new we're growing but we are going to grow together thank you so much for sticking around and watching this video i really do appreciate it you can check out these videos here on options thank you so much guys enjoy the rest of your day and we will see you on the next video

Channel: Pandrea Finance

Views: 12,902

Rating: 4.9644876 out of 5

Keywords: investing, how to invest, 1 million, Robinhood, Robinhood investing, options, learn options, how to trade, how to trade options, how to buy calls, how to make money, how to make money online, how to make $1 million, how to be a millionaire, Robinhood trading, learn to trade, how to invest for beginners, trading, Andrei Jikh, graham stephan, finance, learn finance, Alex Pandrea finance, Robinhood tutorial

Id: 0mB8uXlz5Vk

Length: 20min 47sec (1247 seconds)

Published: Mon Sep 13 2021