Hey 5-Star Trader,
It’s not a secret that there has been a surge of new kinds of buyers in the market. Over the past year, we’ve seen the willingness for “green” traders to jump in and take their best stab at dabbling in the market. From Reddit users to first-time millennial traders, the demographics of who is in the market are certainly changing.
Now, with all these green buyers in the market, we are witnessing a phenomenon where people are buying bearish options for protection. But is this the right way to go about things?
preparing for corrections…
The main thing new traders always do wrong is they always want to buy puts (bearish options) when the market is down on the lows. This is when puts cost the most, and it’s usually when the market turns back to the upside as well.
If investors are interested in protecting their portfolio with puts, they should understand that buying puts when the market is up will equal cheaper entry points and a wider zone of profitability. You can also use multi-leg options strategies like butterflies to bring down your cost basis significantly. Usually when people are asking, “Should we hedge?” it’s the end of the downside move.
Personally, I rarely hedge because I have always found that people lose more money preparing for corrections than is ever lost in the actual correction.
It is never a bad idea to protect yourself when entering a trade, but my suggestion is to assess your risk before you get into a trade, rather than spending money to prepare for a correction. And remember my golden rule: never risk more than you can afford to lose!
Want more trading education? I recently hosted my free webinar where I revealed the secrets to my quarterly gains.