Portfolio protection – hedging todays roller coaster market ride

“Professional” hedge funds may not know how to hedge properly in these markets, but that doesn’t mean you shouldn’t know. The 2008 market is shaping up to be quite the roller coaster ride. Just for today, the major indexes are already down over 2% each. But down markets are no reason to worry and panic over your positions, *IF* you know how to properly hedge.

There are several ways to protect your investments, but the exact approach you take depends on your portfolio, your degree risk aversion, and your own style. Some methods include:

Taking on Dow or S&P Index Puts to protect your long positions
Playing the market through pair trades – a balance of long and short positions. Or take on a short index while going long one of its components.
Using covered calls to limit downside risk on the securities you own
Implementing collar trades to protect your positions – Buying put protection on your long positions, and partially or fully funding that purchase by selling out of the money covered calls on the same position.
Offsetting your long positions with short index positions, such as Proshares or Rydex short ETF’s.

But all of these methods require knowledge and experience to use effectively. Stock options are a great tool for protecting your positions, but using them improperly is a sure way to damage your portfolio even more. Education is key to using stock options properly. If you are disciplined enough to learn on your own, then here are a few recommended books to help you master the art of options and portfolio protection, and also help you sleep better at night:

Covered Calls and LEAPS–A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading) by Joseph R. Hooper