Hedging is Cheap, Expect Losses
You don't hedge and hope the hedge pays off. It's a trade you want to lose.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
Volatility is cheap and the VIX can be bought for about $12.50.
It dipped below $12 briefly and is hanging around extremely low levels.
Why is this important?
As a trader, when volatility is cheap you can buy options with less cost. Conversely, when it is expensive you can sell options and collect large percentage gains in the form of premiums.
As an investor, cheap volatility offers a change to protect your gains.
The year has been yet another solid one for the stock market and if you stayed invested you no doubt have solid gains.
It would be gut-wrenching to watch those gains get wiped out over a massive, unexpected drop in market prices without having a hedge in place.
Those unexpectedly large moves do happen, although luckily not too often.
So, when you are sitting on solid gains like we have enjoyed in 2023 and volatility is cheap, it makes a lot of sense to protect those gains.
It is also a nice way to ensure you have cash available when buying opportunities are presented.
If markets sell off and volatility spikes, you will be enjoying strong gains at the same time that everything is going on sale.
And of course, if markets continue to push higher you should be enjoying that even if you end up taking losses on a hedge.
Your portfolio is moving up! Let the hedge take a hit and close it out if it makes sense to do so.
It is important to remember that VIX is not a long-term investment. Trading volatility never is.
It’s a short-term trade.
The VIX and its related products are mean reverting, which means they tend to move back towards a long-term average. So, you need to time your entry and exit points thoughtfully.
Also, keep in mind that while buying VIX can provide a good hedge, it's not a perfect one. There are times when both the VIX and the stock market can go up or down together.
All of that said, I picked up VIX calls to hedge a portion of my 2023 gains and it looks like I am going to happily close those out for a loss.
Have a great day of trading and close the week out with some green!
-Nate