Options Trading Crash Course: The Complete Crash Course To Investing And Making Money Online. Learn In 12 Days How To Trade Perfectly And Be Profitable On Stocks, Options, Futures. by Cayman Andrew

Author:Cayman, Andrew [Cayman, Andrew]
Language: eng
Format: epub
Published: 2020-09-03T16:00:00+00:00

You can see that the hedge works very effectively, as the value of your portfolio barely changes. For a 5% decline in the S&P index, the value of the option rises. The calculation is (1900-1805*100), so a profit of $9,500 for each option you purchased. You would have to pay a commission on this hedge, so it would not work quite well. Also, note that you still do not reach the original $600,000 value of the portfolio, even if it rises by 5%.

This is the problem with hedging, as it reduces your profits in an upswing, but you can sell the options back to the market, if the market starts to rise, before it reaches a 5% increase, allowing you to benefit from the upswing. If the market did drop by the 5% you expected, then your hedged loss is $600,000 – $590,900 = $9,100 versus an un-hedged loss of $600,000 - $552,900 = $47,100. If it had dropped further, you would almost make a profit instead of a loss.

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