Good morning, traders…

Not all setups are created equal, but some trades play out beautifully. 

You see the pattern, take the shot, and it works. Nothing fancy, just the setup doing its job.

But what about the trades that don’t go your way?

We’ve all been there. You size in, the chart looks solid, the volume confirms it, and then the market decides it’s in a funky mood and does the opposite. 

Those moments separate amateurs from pros. Not because pros always win, but because they know how to stay in the game when they lose.

And that’s where hedging with options comes in…

You might think “hedging” is only something guys on Wall Street do in $5,000 suits, but it’s not. 

It’s a way to control risk in case a trade doesn’t do exactly what you expected. And it’s mandatory to understand if you want to achieve long-term trading success.

Today, I’ll break down how I think about hedging with options, how it helped me when I was wrong (more than once), and how you can apply the same idea to protect your capital (even if you’re betting in the wrong direction).

3 Ways to Hedge with Options

First off, hedging isn’t magic. It isn’t some mega-complicated enigma that only Wharton MBAs can manage. 

It’s just a way to build protection into a trade, especially when there’s uncertainty (or you’re managing a bigger position than usual).

There are many ways to hedge using options. But let’s keep it simple and practical. 

Here are three specific ways I use hedging in my trading…

Using Puts to Hedge Long Positions

Let’s say I’ve got a solid long position in a stock (or call option) that’s been riding a breakout, and I don’t want to sell it. 

But I am worried about short-term weakness.

Rather than dump the position, I’ll buy a put option. That gives me the right to sell at a fixed price, which limits my downside. 

Think of it like buying insurance. I’m still bullish, but I’ve built a floor under my feet in case I’m wrong.

The key is that I’m not trying to profit off the put. I’m trying to protect my long.

The goal here isn’t to squeeze extra profit from the option, but to keep the money that’s already on the table. 

Using Spreads for Cheaper Hedges

Sometimes buying a put outright is too expensive, especially on volatile stocks. That’s where spreads come in.

A simple vertical put spread — buying a put and selling a lower strike put — lets you reduce the cost of the hedge. 

You cap the potential payoff, sure, but you also cap the cost. 

For me, that tradeoff is often worth it, especially when I’m holding a position over earnings or through a choppy market.

Hedging a Portfolio with Index Options

If I’m holding multiple positions and want to protect the overall portfolio, I’ll sometimes buy puts on the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) or Invesco QQQ Trust (NASDAQ: QQQ).

It’s the same logic as hedging a single stock, just zoomed out. If I think the whole market might pull back, and I’ve got multiple longs, an index hedge can soften the blow without having to tinker with each individual name.

I used this exact approach in March 2020 and again in early 2022 when things got shaky. 

The hedge didn’t make me rich. But it gave me peace of mind and kept me from panicking. And that’s worth way more than most people think.

Why Hedging Matters More Than Being Right

You don’t hedge because you expect to lose. You hedge because you’re realistic about the risk. 

The longer I trade, the more I care about managing risk than trying to nail every move. I’ve made plenty of good trades, now I want to keep my money. 

Hedging won’t fix a bad trade or make a losing setup work. But it will keep you alive long enough to stay in the game for the next setup, the one that does work…

And that’s priceless. 

Think of it this way:

• You hedge when you’re up and want to protect gains.
  
• You hedge when you’re unsure but still want exposure.
  
• You hedge when the risk is high and you need to dial in the position.

Is it always “worth the cost?” Well, it won’t always feel like it…

Sometimes, the hedge expires worthless, and you might feel like you wasted the money. But that’s the price of protection. 

Plus, people tend to think this way when it comes to trading, but not in other categories…

If you don’t get sick for twelve months, you don’t sit there lamenting, “Wow, I wish I hadn’t bought health insurance this year. What a waste. ”

You don’t want the hedge to pay out. You want the initial trade to work. 

Plus, if you’re sized correctly, you should still make money on the upside, while guaranteeing you don’t get wrecked on the downside. 

Hedging is a way to take responsibility for the trades you put on, especially in uncertain conditions. 

You don’t need to hedge every trade. But having the skill and confidence to do it when it matters is what separates the consistently profitable pros from the 90% of aspiring traders who lose money.

Happy hedging,

Ben Sturgill

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