Advice on hedging a position using options

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nickyang07

Hi:

I have a relative large position on a mega-cap company. I hope I can sell 1 year later, due to the tax issue. It just made all time high, and I think there is a good chance it will continue to go high. But I'm also kind of concerned that the market will have big drop in one year. So I'm thinking to use options to hedge my position.

Currently, the put options expire 1 year later is a little bit expensive. I also found that many institutions tend to use covered call to hedge a large long position. I'm not expert in options.

Can someone share your wisdom?
 
nickyang07 said:
Hi:

I have a relative large position on a mega-cap company. I hope I can sell 1 year later, due to the tax issue. It just made all time high, and I think there is a good chance it will continue to go high. But I'm also kind of concerned that the market will have big drop in one year. So I'm thinking to use options to hedge my position.

Currently, the put options expire 1 year later is a little bit expensive. I also found that many institutions tend to use covered call to hedge a large long position. I'm not expert in options.

Can someone share your wisdom?
More...

Selling a call option will give you premiums to reduce your cost but, little protection at all! The small amount you earn is not worth the risk of losing your shares. A better option is buying LEAPs options which have a longer expiration date. I am thinking you have a large possible capital gains looming so, you want to protect it. Buy the put options. It will protect you from gap downs if your stock due to any adverse news drops like a rock. A stop loss will not protect you! The advantage of put options aside from the peace of mind is it does not cap your upside in the stock. Say your XYZ stock is now trading at $50 and you buy a $50 put a year out for $8.00 or $800.00. Your stock continues to go up to $100. Now, you sell your $50 put and take the residual value whatever it is and buy another put option, the $100 put now for say a year out. You can keep rolling it up and harvesting more and more profits. Like car insurance, you have to pay for it. Still beats losing your shirt. This guarantees you can sell your stock for $100 at a minimum. If your stock goes up to $200, would you care that you insured and protected your position? What little you give up in profits by buying the put option is well worth it!
 
don't let tax considerations affect your trading. I'd rather pay 28% of a 100% short-term gain and pocket $10k after taxes, than try to save a little more on 18% on taxes and bring home only a couple hundred after taxes.
 
smallfil said:
Selling a call option will give you premiums to reduce your cost but, little protection at all! The small amount you earn is not worth the risk of losing your shares. A better option is buying LEAPs options which have a longer expiration date. I am thinking you have a large possible capital gains looming so, you want to protect it. Buy the put options. It will protect you from gap downs if your stock due to any adverse news drops like a rock. A stop loss will not protect you! The advantage of put options aside from the peace of mind is it does not cap your upside in the stock. Say your XYZ stock is now trading at $50 and you buy a $50 put a year out for $8.00 or $800.00. Your stock continues to go up to $100. Now, you sell your $50 put and take the residual value whatever it is and buy another put option, the $100 put now for say a year out. You can keep rolling it up and harvesting more and more profits. Like car insurance, you have to pay for it. Still beats losing your shirt. This guarantees you can sell your stock for $100 at a minimum. If your stock goes up to $200, would you care that you insured and protected your position? What little you give up in profits by buying the put option is well worth it!
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Thanks for your careful explanation. I agree with you that a longer put options sound like the best choice to hedge.

I will see how I want to execute it. I'm wondering if I should hedge all position at once, or buy the LEAPS options with batches.
 
DannoXYZ said:
don't let tax considerations affect your trading. I'd rather pay 28% of a 100% short-term gain and pocket $10k after taxes, than try to save a little more on 18% on taxes and bring home only a couple hundred after taxes.
More...

I know I should not think about tax in the trading. I think my concern is mainly because the stock may continue to rise. I guess right now, the best option is to but the put, just for the safety wise, considering the risk of current market
 
yup, some long OTM puts will let you lock in profits without selling the stock. Check pricing, may be more profitable than LEAPs if you're able to sell the puts and get back in at different price to stay close to stock's price as it rises.
 
nickyang07 said:
I hope I can sell 1 year later, due to the tax issue.
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While I so-much agree with the sentiment of "Don't let a tax issue steer your portfolio...", in this case, I agree *more* (but not totally) with you: it's a 100% guaranteed gain. It's a risk-free return *way* above the market, for that chunk of capital.

At the same time, though: your gain right now is very-much NOT guaranteed: if that stock plummets, your profits are lost *first*. Dayyyyy-ummmmm. SO!

What can you do to *protect* your holding til that 100% window gets crossed? Throw a collar around the thing: buy put insurance, financing it with a sold call. Finesse the numbers (strikes vis delta vis IV) til they work for you. Seek a credit -- may not be big, but it's a bonus.

You won't get equity-market returns by holding this way, but you already GOT those returns, and you're just holding on to gain the TAX system's gift as your return. So, file this away as a bond trade (yknowwwww, a "safety" trade).
 
DannoXYZ said:
if you're able to sell the puts and get back in at different price to stay close to stock's price as it rises.
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If he sells puts here, and the stock plummets, he's not only lost his current gain, but now is on the hook for however much the puts have now popped in price. That is a double-bad day. :confused:
 
nickyang07 said:
I know I should not think about tax in the trading. I think my concern is mainly because the stock may continue to rise. I guess right now, the best option is to but the put, just for the safety wise, considering the risk of current market
More...

Trends last longer than most people think. It is called dollar counting. Last December 2017, I made that huge mistake. I took $1,900.00 in profits on 3 options trades too early. Had I waited just another 2 weeks, my profits on my put option trades would have been $11,550.00. This was on put option trades. Hedging your positions is the smart way to play it if you have substantially large profits.
 
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