When you made the decision to become a trader and risk your hard earned money in search of a return, you agreed with yourself that for money you would take on some form of stress.
While the majority of retail investors get long on a number of stocks that they hope will appreciate over time, the fact that buying stocks makes you instantly biased in the direction you want … is you the stock must go up to make money.
If you haven’t lived under a rock in the past few years, you will find that the stock market is not just rising steadily; it can also go down as well as sideways.
After retiring from my first career in 2014, I founded my investment and trading company, Bassett’s fortune.
My strategy back then was a simple arbitrage – I bought dividend stocks, borrowed money from my broker on margin at lower interest rates than the dividend payout, and kept the spread between the dividend rate and the interest rate to myself.
The strategy worked incredibly well, but I had to invest quite a bit of money to get enough income from the arbitrage.
By the time I was living overseas in Asia, my trading business had just become my new career and I was under pressure to maintain our lifestyle for the foreseeable future from this start-up Companies dare.
The pressure was great, but I was ready for it.
If 100% of your income is from trading or investing, the fear of a market crash could increase than if you were building a retirement account and didn’t need instant access to funds.
While my young trading business was incredibly profitable, after the market closed I would look for the next potential black swan event, research possible dividend cuts at the companies I had invested in, or just think about the future of my business (and life) when a major market event unexpectedly struck.
Keep in mind that by this point in my life I had gone through a decent number of market crashes and after getting burned I decided to approach the market much more cautiously.
I was in a position where I needed the income I was making, but I was up at night worrying about the “what if” that was clouding my daily activities.
After endless internet research about market crashes (there are a lot) I stumbled upon an article in which a classic car discusses the possibilities of the next market crash and the ways to protect against a future market crash.
Ultimately, I hired this man to teach me about options and for the past seven years I have had the best hands-on experience of how markets work and how to protect your trades or investments no matter which way the market is headed .
It doesn’t matter how big your portfolio is, protecting your hard-earned capital should be the first element you care about.
Nowadays I still practice this arbitrage method but the difference is that I am out of the money covert calls to secure my account, to prepare for a downturn or a very flat market.
Not only am I insured against an unexpected downturn in the near future, but I can do that too Time lapse of the covered calls that depreciate over time, and I also enjoy the reduction in margin interest due to the net credits I add to my covered short call account.
Instead of sleeping badly at night and wondering what will happen tomorrow, I now sleep like a baby knowing that if the market collapses, I will have a new income opportunity in the morning.
Also, capturing both sides of the market will allow you to slow down your strategy, listen to the market and react accordingly instead of trying to predict every next move in the market.
Check out this article that Gavin wrote and offers Examples of securing a position.
While my portfolio is always hedged, I spent a significant amount of money on hedging around the 2020 presidential election.
While it was evident that things were generally tense due to the pandemic and unrest at the time, there were so many unknowns surrounding the election that my broker slowly began to introduce higher margin requirements.
While I had significant positions, I spent tens of thousands of dollars on hedging for my portfolio over a period of approximately four months.
When thinking about my decision to spend that money on hedges, I kept a cool head during the one strong market volatility, I was able to sleep incredibly well at night, which refreshed me for the next day of trading, and I was able to post some of my biggest trading profit days, weeks, and months on the records.
Margin buying is definitely not for the faint of heart or for everyone, but you don’t need leverage to hedge your portfolio – almost all portfolios can benefit from some kind of hedge.
If your trading business or investment portfolio puts you under stress from your trading business or investment portfolio, consider the steps to learn how to hedge.
Check yourself to see how well you sleep at night.
About the author: Charlie Bassett is the founder of Bassett’s fortune, an investment company specializing in the sale of stock option awards. He is also an instructor for OptionsTradingIQ.com. To book a coaching session with Charlie, send an email to [email protected]
Disclaimer: The information above is for For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.