I’ve said it before and I’ll say it again … you’ve gotta be willing to alter your strategy when the market calls for it.
Let me provide an example from my recent trading…
I’ve been holding March-expiring puts on the ProShares Bitcoin Strategy ETF (NYSEARCA: BITO) for several weeks now.
But over the past two weeks, crypto started surging and my puts were rapidly losing value. I knew I had to do something … fast!
Instead of helplessly watching my premium disappear, I decided to get proactive…
So, what did I do? I started buying weekly calls on crypto stocks to hedge against my puts position.
My initial goal was to simply pad my losses, but the hedges ran further than I ever expected.
Ultimately, my call hedges actually outpaced my put losses to leave me in the green.
Now, I want to explain my thought process behind these trades. That way, you can learn how to potentially hedge your losses in the future.
Keep reading and I’ll show you…
What to Do When You’re Holding a Loser
Like all other traders, I hate taking losses.
I understand that losses are an unavoidable part of trading. That said, I always look for ways to lessen my losses when possible.
It all starts with the pain of holding a losing position. When sitting on a losing trade, what can you do?
You only have a few choices:
- Do nothing and watch your money disappear
- Cut your losses quickly and move on to the next trade
- Hedge your losses by holding your initial position while buying contracts on the opposite side of the trade
Option A is clearly unacceptable…
If you’re gonna sit around and watch your account deteriorate in front of your eyes, you shouldn’t be trading in the first place.
For anyone other than very experienced traders, I usually recommend option B…
Cutting your losing positions quickly is one of the best things you can do to avoid blowing your account up.
But occasionally, employing option C can be the most advantageous choice…
Hedging a losing position can potentially prevent you from taking further losses … and maybe even bring you some much-needed profits.
Let me show you what I mean by breaking down a few of my trades from last week…
How I Hedged My Crypto Puts
As I’ve explained before, I’m very bearish on crypto in the big picture.
This is why I’ve been holding long-term puts on BITO.
But when crypto started its recent rally, I wasn’t about to sit around and watch my money disappear.
The first thing I did was size down my BITO puts position. I sold 300 contracts, down 42%, for a loss of $42,228.
This stung a lot, but it was the right move to make. I didn’t sell all of my puts, I simply reduced my risk…
Then, while still holding a sizeable BITO puts position, I bought just under $60,000 worth of Marathon Digital Holdings Inc. (NASDAQ: MARA) 1/20/23 $6 calls for $0.40.
MARA often trades in tandem with BITO, so I figured the MARA calls could work as an effective hedge to my BITO puts.
Sure enough, I was right…
I sold the MARA calls later that day at $1.11 for a gain of 187% and a profit of $107,283 — making more than double what I lost on BITO in just a few hours!
The 3 Key Lessons I Learned from These Trades
So, what are some valuable lessons we can gather from my recent hedge?
- Don’t get married to your predictions (or positions). Had I stubbornly refused to trade calls on crypto because of my overall bearish view of the sector, I’d be sitting on massive losses right now. Here’s yet another example of why you must be willing to switch your game plan up when the price action calls for it!
- Manage your trades carefully. If you have multiple positions open at once (which I only recommend to more experienced traders), you’ve gotta have a reliable system for managing the different plays together. Even a small handful of options trades can be volatile enough to warrant constant babysitting. Keep your trades on a short leash!
- Be unforgiving when cutting losses. Any losing position needs to get cut immediately or reduced significantly — no ‘if, and, or but’!
Hedging options saved me this month, but it’s a delicate balancing act that should be reserved for more experienced traders.
Do I recommend trying this at home? It depends on your level of experience, but probably not.
That said, if you keep trading, one day you’ll find yourself in a spot where you’re experienced enough (and the conditions are right) to put a hedge on…
And when that day comes, now you’ll know what to do.