Advice on hedging a position using options

[nickyang07]

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).

You are right. Buying a put, and meanwhile, sell a covered call could help me get back the insurance fee. But I need to be really careful to write those things, though

 

[viruscore1]

You are right. Buying a put, and meanwhile, sell a covered call could help me get back the insurance fee. But I need to be really careful to write those things, though

If you're confidently bullish, forget buying protective put. Sell otm call and collect premium. Still bullish sell otm put, use premium buy call for synthetic long. Then you sell stock position and sit back counting profits.

 

[ironchef]

Just put on a Collar to bracket your gain and loss if you are already satisfied with the gains. This is a fairly standard practice for those of us that have large company stocks or stock options.

Talk to your broker.

 

[ETJ]

Are you free to trade or is by chance 144 stock? Did you buy it in the open market or is it part of a compensation scheme?

 

[Vivaan Reyansh]

I think you should buy put options, this is much better than you going for a covered call. The reason is, with covered call the best you to get is the premium this means that your profit is limited to the premium that you receive. On the other hand, if you'd buy a put option, the only lose that you might encounter in case the market grows is the premium that you paid. Otherwise, the profits are limitless.

 

[smallfil]

You are right. Buying a put, and meanwhile, sell a covered call could help me get back the insurance fee. But I need to be really careful to write those things, though

That is now a collar. Take note you are risking your stock being exercised in the event your stock moves substantially, in the money by selling the call option. If your option gets exercised, you miss on the upside!

 

[DannoXYZ]

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.

sorry i meant sell the long puts and purchase a closer put to raise his "stop"

 

[Epicurus]

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?

The conventional approach I believe is to use a collar, as others have outlined here.

As an alternative, I'm wondering whether a Put Ratio Backspread would do the job.

You'd have to play with strikes to see if its cheaper than just buying Puts (single leg).

Benefit is unlimited upside still, you are protected from a big move down, but trade-off is exposure to loss on a smaller fall in the price.

I don't think this strategy is normally used for hedging but might be worth testing.

There is a bit of stuff on google. Found this link: https://www.elitetrader.com/et/threads/hedging-w-backspreads-vs-protective-puts.