{"id":49831,"date":"2020-05-01T12:51:29","date_gmt":"2020-05-01T16:51:29","guid":{"rendered":"https:\/\/www.smbtraining.com\/blog\/?p=49831"},"modified":"2020-05-01T12:51:29","modified_gmt":"2020-05-01T16:51:29","slug":"how-to-make-large-profits-from-options-hedges","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/how-to-make-large-profits-from-options-hedges","title":{"rendered":"How To Make Large Profits From Options Hedges"},"content":{"rendered":"

Options strategies can be used to protect large equity trading profits for bullish traders who are concerned about a market downturn. In this video, we give you a compelling example of how traders can use a technique originally designed to protect equity trading profits into a powerful profit center to enhance gains on long positions even as the market is plummeting.<\/p>\nView Video Transcript<\/strong><\/span>

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<\/div>\n<\/div>\n
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in the middle of February just a few<\/div>\n<\/div>\n<\/div>\n
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months ago before this pandemic took a<\/div>\n<\/div>\n<\/div>\n
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wrecking ball to the 10-year his stark<\/div>\n<\/div>\n<\/div>\n
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bull market that just ended it’s almost<\/div>\n<\/div>\n<\/div>\n
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easy to forget that the market had<\/div>\n<\/div>\n<\/div>\n
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reached its all-time highs and along<\/div>\n<\/div>\n<\/div>\n
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with that came an awful lot of traders<\/div>\n<\/div>\n<\/div>\n
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and investors many like you and me who<\/div>\n<\/div>\n<\/div>\n
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were sitting on huge gains on stocks<\/div>\n<\/div>\n<\/div>\n
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they were long and we’re really not<\/div>\n<\/div>\n<\/div>\n
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interested in giving those profits back<\/div>\n<\/div>\n<\/div>\n
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I’m the head trader SMB capitals options<\/div>\n<\/div>\n<\/div>\n
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trading desk and I can tell you from<\/div>\n<\/div>\n<\/div>\n
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personal experience that the traders in<\/div>\n<\/div>\n<\/div>\n
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our firm were faced with this issue in a<\/div>\n<\/div>\n<\/div>\n
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serious way in this video I’m going to<\/div>\n<\/div>\n<\/div>\n
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run you step-by-step through a way that<\/div>\n<\/div>\n<\/div>\n
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options could have been used to turn an<\/div>\n<\/div>\n<\/div>\n
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incredible equity trade into a<\/div>\n<\/div>\n<\/div>\n
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spectacular options trade just by using<\/div>\n<\/div>\n<\/div>\n
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some very simple options trading<\/div>\n<\/div>\n<\/div>\n
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concepts that I think you’re going to<\/div>\n<\/div>\n<\/div>\n
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find pretty compelling so stick around<\/div>\n<\/div>\n<\/div>\n
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hi I’m Seth Freiburg and I’m the head<\/div>\n<\/div>\n<\/div>\n
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trader of SMB capitals options trading<\/div>\n<\/div>\n<\/div>\n
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desk SMB capital is a proprietary<\/div>\n<\/div>\n<\/div>\n
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trading firm located in midtown<\/div>\n<\/div>\n<\/div>\n
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Manhattan and we provide capital for<\/div>\n<\/div>\n<\/div>\n
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options and equity traders from all over<\/div>\n<\/div>\n<\/div>\n
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the world trading both remotely and in<\/div>\n<\/div>\n<\/div>\n
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our offices here in New York City now<\/div>\n<\/div>\n<\/div>\n
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I’d like to suggest that you click on<\/div>\n<\/div>\n<\/div>\n
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our subscribe button right now so that<\/div>\n<\/div>\n<\/div>\n
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you don’t miss any of our free trading<\/div>\n<\/div>\n<\/div>\n
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videos that we produce for traders and<\/div>\n<\/div>\n<\/div>\n
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investors all over the world they’re<\/div>\n<\/div>\n<\/div>\n
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really very valuable as most of you know<\/div>\n<\/div>\n<\/div>\n
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one of those popular trading stocks over<\/div>\n<\/div>\n<\/div>\n
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the last six months has been Tesla in<\/div>\n<\/div>\n<\/div>\n
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mid-october Tesla took off to the upside<\/div>\n<\/div>\n<\/div>\n
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starting at 250 and nearly quadrupling<\/div>\n<\/div>\n<\/div>\n
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at one point up as high as 968 in early<\/div>\n<\/div>\n<\/div>\n
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february you’ll then see that the stock<\/div>\n<\/div>\n<\/div>\n
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was pummeled by fears of the Cova Denine<\/div>\n<\/div>\n<\/div>\n
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teen epidemic destroying the world<\/div>\n<\/div>\n<\/div>\n
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economy in a month later it was down to<\/div>\n<\/div>\n<\/div>\n
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350 only to turn around and double off<\/div>\n<\/div>\n<\/div>\n
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of that point by mid-april back up over<\/div>\n<\/div>\n<\/div>\n
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700 as the market fears began to subside<\/div>\n<\/div>\n<\/div>\n
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well there are traders around here who<\/div>\n<\/div>\n<\/div>\n
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stayed long Tesla from late last year<\/div>\n<\/div>\n<\/div>\n
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through mid-february who were sitting on<\/div>\n<\/div>\n<\/div>\n
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huge gains just as the seriousness of<\/div>\n<\/div>\n<\/div>\n
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this pandemic was beginning to dawn on<\/div>\n<\/div>\n<\/div>\n
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the financial markets ok so let’s say<\/div>\n<\/div>\n<\/div>\n
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that there was a trader who was sitting<\/div>\n<\/div>\n<\/div>\n
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on a large gain and Tesla in<\/div>\n<\/div>\n<\/div>\n
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mid-february with the following quandary<\/div>\n<\/div>\n<\/div>\n
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let’s say that trader had a large gain<\/div>\n<\/div>\n<\/div>\n
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in Tesla and might not want to sell his<\/div>\n<\/div>\n<\/div>\n
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Tesla position because he’s very high on<\/div>\n<\/div>\n<\/div>\n
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the stock and he thinks it’s it<\/div>\n<\/div>\n<\/div>\n
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ultimately has more upside if he sells<\/div>\n<\/div>\n<\/div>\n
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the shares now he’ll take a large<\/div>\n<\/div>\n<\/div>\n
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capital gain on those shares and it tax<\/div>\n<\/div>\n<\/div>\n
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hit from that will be substantial yet at<\/div>\n<\/div>\n<\/div>\n
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the same time there were a lot of<\/div>\n<\/div>\n<\/div>\n
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traders out there sensing the impending<\/div>\n<\/div>\n<\/div>\n
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storm which was emerging as a result of<\/div>\n<\/div>\n<\/div>\n
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the pandemic and so they were faced with<\/div>\n<\/div>\n<\/div>\n
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the bad choice either write out a<\/div>\n<\/div>\n<\/div>\n
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potentially massive sell-off in Tesla or<\/div>\n<\/div>\n<\/div>\n
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sell the shares and take a sizable tax<\/div>\n<\/div>\n<\/div>\n
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hit on the capital gain from the great<\/div>\n<\/div>\n<\/div>\n
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trade so let’s take a look at a really<\/div>\n<\/div>\n<\/div>\n
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compelling alternative that would have<\/div>\n<\/div>\n<\/div>\n
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been available to a trader in that<\/div>\n<\/div>\n<\/div>\n
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position because of the unique nature of<\/div>\n<\/div>\n<\/div>\n
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options and the enormous help that they<\/div>\n<\/div>\n<\/div>\n
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can give to equity traders in situations<\/div>\n<\/div>\n<\/div>\n
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like these ok so let’s go back to<\/div>\n<\/div>\n<\/div>\n
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January 13th and you can see on that day<\/div>\n<\/div>\n<\/div>\n
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that Tesla had broken above 500 for the<\/div>\n<\/div>\n<\/div>\n
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fur<\/div>\n<\/div>\n<\/div>\n
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time and so a typical swing trader could<\/div>\n<\/div>\n<\/div>\n
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have sensed a breakout here and so he<\/div>\n<\/div>\n<\/div>\n
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might have entered a long stock position<\/div>\n<\/div>\n<\/div>\n
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in Tesla so let’s say that a swing<\/div>\n<\/div>\n<\/div>\n
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trader decides that this move is the<\/div>\n<\/div>\n<\/div>\n
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start of something substantial and Tesla<\/div>\n<\/div>\n<\/div>\n
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so he goes ahead and buys 400 shares of<\/div>\n<\/div>\n<\/div>\n
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Tesla at 5:02 52 which is where Tesla<\/div>\n<\/div>\n<\/div>\n
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was trading on that day January 13th and<\/div>\n<\/div>\n<\/div>\n
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as we all know that would have been a<\/div>\n<\/div>\n<\/div>\n
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good call and by February 4th Tesla made<\/div>\n<\/div>\n<\/div>\n
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an explosive up side move and in less<\/div>\n<\/div>\n<\/div>\n
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than a month his 400 shares which<\/div>\n<\/div>\n<\/div>\n
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originally would have cost around 200<\/div>\n<\/div>\n<\/div>\n
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1000 are now worth upwards of 300<\/div>\n<\/div>\n<\/div>\n
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$64,000 for a gain of over 160 3,000 at<\/div>\n<\/div>\n<\/div>\n
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the same time this is a trader that<\/div>\n<\/div>\n<\/div>\n
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would have begun to you know hear<\/div>\n<\/div>\n<\/div>\n
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rumblings of this growing virus threat<\/div>\n<\/div>\n<\/div>\n
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in China and so he could have easily<\/div>\n<\/div>\n<\/div>\n
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looked at his substantial gain and asked<\/div>\n<\/div>\n<\/div>\n
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himself am i ready to close this trade<\/div>\n<\/div>\n<\/div>\n
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and if the answer was no because he felt<\/div>\n<\/div>\n<\/div>\n
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there’s more upside on his Tesla shares<\/div>\n<\/div>\n<\/div>\n
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but at the same time he’s troubled that<\/div>\n<\/div>\n<\/div>\n
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he’s sitting on a huge gain that was at<\/div>\n<\/div>\n<\/div>\n
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risk given the storm clouds that were<\/div>\n<\/div>\n<\/div>\n
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beginning to form in the market he might<\/div>\n<\/div>\n<\/div>\n
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ask himself<\/div>\n<\/div>\n<\/div>\n
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are there any option strategies that I<\/div>\n<\/div>\n<\/div>\n
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can employ where I can protect my<\/div>\n<\/div>\n<\/div>\n
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profits at a reasonable cost and the<\/div>\n<\/div>\n<\/div>\n
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answer fortunately is a resounding yes<\/div>\n<\/div>\n<\/div>\n
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there are not only techniques for<\/div>\n<\/div>\n<\/div>\n
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protecting your profits but they can be<\/div>\n<\/div>\n<\/div>\n
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structured to have no cost at all now<\/div>\n<\/div>\n<\/div>\n
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before we get into exactly what could<\/div>\n<\/div>\n<\/div>\n
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have been done with options at this<\/div>\n<\/div>\n<\/div>\n
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point which I think you’re gonna find<\/div>\n<\/div>\n<\/div>\n
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intriguing I wanted to let you know that<\/div>\n<\/div>\n<\/div>\n
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there really are sound viable long-term<\/div>\n<\/div>\n<\/div>\n
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techniques for trading options for<\/div>\n<\/div>\n<\/div>\n
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income and in fact we’re currently<\/div>\n<\/div>\n<\/div>\n
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running a to our free intensive workshop<\/div>\n<\/div>\n<\/div>\n
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at the moment we’re will be teaching you<\/div>\n<\/div>\n<\/div>\n
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three of those strategies that real<\/div>\n<\/div>\n<\/div>\n
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professional options traders use<\/div>\n<\/div>\n<\/div>\n
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including a really simple but incredibly<\/div>\n<\/div>\n<\/div>\n
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effective technique that some of the<\/div>\n<\/div>\n<\/div>\n
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greatest investors in the world like<\/div>\n<\/div>\n<\/div>\n
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Warren Buffett use all the time plus an<\/div>\n<\/div>\n<\/div>\n
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options trading strategy that has a<\/div>\n<\/div>\n<\/div>\n
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statistical 80 percent probability of<\/div>\n<\/div>\n<\/div>\n
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profit month in and month out plus an<\/div>\n<\/div>\n<\/div>\n
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option strategy that you can employ with<\/div>\n<\/div>\n<\/div>\n
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the stock that you like where you’ll<\/div>\n<\/div>\n<\/div>\n
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make your target profit whether the<\/div>\n<\/div>\n<\/div>\n
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stock goes up goes nowhere or even goes<\/div>\n<\/div>\n<\/div>\n
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down a small percentage<\/div>\n<\/div>\n<\/div>\n
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so if those strategies would be of<\/div>\n<\/div>\n<\/div>\n
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interest to you then you should check<\/div>\n<\/div>\n<\/div>\n
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out the free options class that we’re<\/div>\n<\/div>\n<\/div>\n
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currently running just go ahead and<\/div>\n<\/div>\n<\/div>\n
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click the link that should be appearing<\/div>\n<\/div>\n<\/div>\n
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now at the top right corner of your<\/div>\n<\/div>\n<\/div>\n
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screen that will open the free<\/div>\n<\/div>\n<\/div>\n
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registration page in a new window so<\/div>\n<\/div>\n<\/div>\n
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don’t worry you won’t lose this video or<\/div>\n<\/div>\n<\/div>\n
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you can just head on over to options<\/div>\n<\/div>\n<\/div>\n
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class comm to register for this free<\/div>\n<\/div>\n<\/div>\n
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intensive workshop it’s a rare<\/div>\n<\/div>\n<\/div>\n
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opportunity for retail traders and<\/div>\n<\/div>\n<\/div>\n
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investors to learn directly from Wall<\/div>\n<\/div>\n<\/div>\n
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Street traders but that’s exactly what<\/div>\n<\/div>\n<\/div>\n
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you’ll be getting through this free<\/div>\n<\/div>\n<\/div>\n
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online workshop so click the link to<\/div>\n<\/div>\n<\/div>\n
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sign up now and don’t miss it so getting<\/div>\n<\/div>\n<\/div>\n
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back to our trade on February 4th this<\/div>\n<\/div>\n<\/div>\n
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long Tesla share trade is up over 160<\/div>\n<\/div>\n<\/div>\n
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thousand dollars and understandably<\/div>\n<\/div>\n<\/div>\n
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you’d be thinking about how to preserve<\/div>\n<\/div>\n<\/div>\n
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those profits without exiting the trade<\/div>\n<\/div>\n<\/div>\n
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now before we can structure a trade like<\/div>\n<\/div>\n<\/div>\n
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this a trader needs to ask himself two<\/div>\n<\/div>\n<\/div>\n
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questions the first question is if Tesla<\/div>\n<\/div>\n<\/div>\n
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turned around and sold off at this<\/div>\n<\/div>\n<\/div>\n
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juncture at what price would a trader be<\/div>\n<\/div>\n<\/div>\n
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happy to own 200 more shares of Tesla so<\/div>\n<\/div>\n<\/div>\n
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let’s suppose the trader was willing to<\/div>\n<\/div>\n<\/div>\n
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add 200 shares to your position if Tesla<\/div>\n<\/div>\n<\/div>\n
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sold off down to 650 the second question<\/div>\n<\/div>\n<\/div>\n
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would be at what price would a trader be<\/div>\n<\/div>\n<\/div>\n
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convinced that Tesla is overbought and<\/div>\n<\/div>\n<\/div>\n
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you’d be more than willing to close your<\/div>\n<\/div>\n<\/div>\n
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trade and sell your current shares all<\/div>\n<\/div>\n<\/div>\n
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400 of them and suppose that your answer<\/div>\n<\/div>\n<\/div>\n
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was if Tesla gets above 1060 you’d be<\/div>\n<\/div>\n<\/div>\n
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willing to look at selling and taking<\/div>\n<\/div>\n<\/div>\n
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your profits so once we answer those two<\/div>\n<\/div>\n<\/div>\n
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questions for ourselves we can put<\/div>\n<\/div>\n<\/div>\n
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together the hedge now before we get<\/div>\n<\/div>\n<\/div>\n
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into that though I wanted to make<\/div>\n<\/div>\n<\/div>\n
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certain that anyone watching this<\/div>\n<\/div>\n<\/div>\n
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understands how puts and calls work on<\/div>\n<\/div>\n<\/div>\n
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equities otherwise you won’t be able to<\/div>\n<\/div>\n<\/div>\n
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follow this example for those of you<\/div>\n<\/div>\n<\/div>\n
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familiar with puts and calls please bear<\/div>\n<\/div>\n<\/div>\n
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with us this was going to be brief then<\/div>\n<\/div>\n<\/div>\n
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we’ll jump back in to this remarkable<\/div>\n<\/div>\n<\/div>\n
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options hedge that could have been<\/div>\n<\/div>\n<\/div>\n
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constructed in this exact situation most<\/div>\n<\/div>\n<\/div>\n
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of you have probably heard of a call<\/div>\n<\/div>\n<\/div>\n
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which is a security that allows a trader<\/div>\n<\/div>\n<\/div>\n
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to buy the right to purchase 100 shares<\/div>\n<\/div>\n<\/div>\n
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of a stock at the strike price of that<\/div>\n<\/div>\n<\/div>\n
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option before that option expires so for<\/div>\n<\/div>\n<\/div>\n
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example the April 17th Tesla 1060 call<\/div>\n<\/div>\n<\/div>\n
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entitles the buyer of that call to<\/div>\n<\/div>\n<\/div>\n
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purchase 100 shares of Tesla<\/div>\n<\/div>\n<\/div>\n
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at 1060 per share any time before that<\/div>\n<\/div>\n<\/div>\n
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option expires on April 17th he can<\/div>\n<\/div>\n<\/div>\n
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exercise that now a put option on the<\/div>\n<\/div>\n<\/div>\n
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other hand entitles the put seller to<\/div>\n<\/div>\n<\/div>\n
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sell 100 shares of a stock that say he<\/div>\n<\/div>\n<\/div>\n
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already owns at the strike price of the<\/div>\n<\/div>\n<\/div>\n
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put option at any time before that put<\/div>\n<\/div>\n<\/div>\n
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expires people will frequently buy puts<\/div>\n<\/div>\n<\/div>\n
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on stocks that they own where they’d<\/div>\n<\/div>\n<\/div>\n
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like to lock in the lowest price that<\/div>\n<\/div>\n<\/div>\n
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they could sell their shares afford to<\/div>\n<\/div>\n<\/div>\n
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limit their losses if the stock goes<\/div>\n<\/div>\n<\/div>\n
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down so for example someone owned in<\/div>\n<\/div>\n<\/div>\n
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April 17th 820 Tesla put if Tesla really<\/div>\n<\/div>\n<\/div>\n
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tanked they could sell their shares for<\/div>\n<\/div>\n<\/div>\n
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820 no matter how low Tesla stock price<\/div>\n<\/div>\n<\/div>\n
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got so generally speaking a call option<\/div>\n<\/div>\n<\/div>\n
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on a stock goes up in value when the<\/div>\n<\/div>\n<\/div>\n
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stock rallies because a call options the<\/div>\n<\/div>\n<\/div>\n
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right to buy shares at a fixed price and<\/div>\n<\/div>\n<\/div>\n
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that right gets more valuable as the<\/div>\n<\/div>\n<\/div>\n
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stock price gets closer to the strike<\/div>\n<\/div>\n<\/div>\n
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price of that call similarly a put will<\/div>\n<\/div>\n<\/div>\n
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generally become more valuable when a<\/div>\n<\/div>\n<\/div>\n
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stock’s price is gone down because of<\/div>\n<\/div>\n<\/div>\n
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the right to sell shares at a fixed<\/div>\n<\/div>\n<\/div>\n
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price gets more valuable as those shares<\/div>\n<\/div>\n<\/div>\n
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drop okay so let’s take a look at what<\/div>\n<\/div>\n<\/div>\n
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we could have put together that day<\/div>\n<\/div>\n<\/div>\n
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let’s start at the top on the call side<\/div>\n<\/div>\n<\/div>\n
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of the proposed trade and you’ll see<\/div>\n<\/div>\n<\/div>\n
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that we sold four calls to 1060 and then<\/div>\n<\/div>\n<\/div>\n
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we bought four puts at 8:20 and we also<\/div>\n<\/div>\n<\/div>\n
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sold two puts it’s 650 now let’s really<\/div>\n<\/div>\n<\/div>\n
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break down what’s going on here and why<\/div>\n<\/div>\n<\/div>\n
\n
\n
so first off on the call side we’re<\/div>\n<\/div>\n<\/div>\n
\n
\n
selling those for 1060 calls<\/div>\n<\/div>\n<\/div>\n
\n
\n
well if tesla closes over 1060 when the<\/div>\n<\/div>\n<\/div>\n
\n
\n
options expire will be required to sell<\/div>\n<\/div>\n<\/div>\n
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\n
those 400 shares to the call buyer for<\/div>\n<\/div>\n<\/div>\n
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\n
1060 which is the exact price that he’d<\/div>\n<\/div>\n<\/div>\n
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\n
hypothetically be willing to sell the<\/div>\n<\/div>\n<\/div>\n
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shares for anyway remember each option<\/div>\n<\/div>\n<\/div>\n
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\n
represents 100 shares so four options<\/div>\n<\/div>\n<\/div>\n
\n
\n
would remove all of the shares at what<\/div>\n<\/div>\n<\/div>\n
\n
\n
you’ll remember was the upside target<\/div>\n<\/div>\n<\/div>\n
\n
\n
price on the shares then we went down to<\/div>\n<\/div>\n<\/div>\n
\n
\n
the put side and bought for 820 puts now<\/div>\n<\/div>\n<\/div>\n
\n
\n
Tesla’s trading at 911<\/div>\n<\/div>\n<\/div>\n
\n
\n
so those puts would have value if Tesla<\/div>\n<\/div>\n<\/div>\n
\n
\n
dropped down below a 20 which is 91<\/div>\n<\/div>\n<\/div>\n
\n
\n
points below the current market so<\/div>\n<\/div>\n<\/div>\n
\n
\n
you’ll remember were up over $160,000 on<\/div>\n<\/div>\n<\/div>\n
\n
\n
the trade so if Tesla closes below 820<\/div>\n<\/div>\n<\/div>\n
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\n
on<\/div>\n<\/div>\n<\/div>\n
\n
\n
expiration day the trader would exercise<\/div>\n<\/div>\n<\/div>\n
\n
\n
his put and sell them for 820 which is<\/div>\n<\/div>\n<\/div>\n
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\n
giving up 91 points on each of his<\/div>\n<\/div>\n<\/div>\n
\n
\n
shares from the current level or a total<\/div>\n<\/div>\n<\/div>\n
\n
\n
of about 36,000 dollars in profit giving<\/div>\n<\/div>\n<\/div>\n
\n
\n
back on all the shares so obviously you<\/div>\n<\/div>\n<\/div>\n
\n
\n
wouldn’t like that but if that did<\/div>\n<\/div>\n<\/div>\n
\n
\n
happen you’d still have about $125,000<\/div>\n<\/div>\n<\/div>\n
\n
\n
of profit left on the Tesla shares<\/div>\n<\/div>\n<\/div>\n
\n
\n
remember with a hedge you’re looking to<\/div>\n<\/div>\n<\/div>\n
\n
\n
lock in most of your profits while still<\/div>\n<\/div>\n<\/div>\n
\n
\n
giving yourself some room to make more<\/div>\n<\/div>\n<\/div>\n
\n
\n
if the shares continue to climb then<\/div>\n<\/div>\n<\/div>\n
\n
\n
finally you can sell two of those 650<\/div>\n<\/div>\n<\/div>\n
\n
\n
puts remember in this scenario you’re<\/div>\n<\/div>\n<\/div>\n
\n
\n
willing to increase your position in<\/div>\n<\/div>\n<\/div>\n
\n
\n
Tesla if the stock dropped to 650 now<\/div>\n<\/div>\n<\/div>\n
\n
\n
significantly I’d like you to take a<\/div>\n<\/div>\n<\/div>\n
\n
\n
look at this transaction from another<\/div>\n<\/div>\n<\/div>\n
\n
\n
perspective which is that cash flow of<\/div>\n<\/div>\n<\/div>\n
\n
\n
this transaction so first of all we sold<\/div>\n<\/div>\n<\/div>\n
\n
\n
those for 1060 Tesla calls and those<\/div>\n<\/div>\n<\/div>\n
\n
\n
were priced at 91 dollars and 70 cents<\/div>\n<\/div>\n<\/div>\n
\n
\n
and remember all options represent 100<\/div>\n<\/div>\n<\/div>\n
\n
\n
shares so you multiply that by 100 and<\/div>\n<\/div>\n<\/div>\n
\n
\n
we sold four of those so that totals<\/div>\n<\/div>\n<\/div>\n
\n
\n
thirty six thousand six hundred eighty<\/div>\n<\/div>\n<\/div>\n
\n
\n
dollars of positive cash flow on the<\/div>\n<\/div>\n<\/div>\n
\n
\n
four calls we then bought those four<\/div>\n<\/div>\n<\/div>\n
\n
\n
eight twenty puts for 93 dollars and<\/div>\n<\/div>\n<\/div>\n
\n
\n
thirteen cents<\/div>\n<\/div>\n<\/div>\n
\n
\n
so those four caused the cash outflow of<\/div>\n<\/div>\n<\/div>\n
\n
\n
37 752 finally we sold those two 650<\/div>\n<\/div>\n<\/div>\n
\n
\n
puts for a total cash inflow of 69 84<\/div>\n<\/div>\n<\/div>\n
\n
\n
and so if you add it all up we have more<\/div>\n<\/div>\n<\/div>\n
\n
\n
than six thousand dollars of cash inflow<\/div>\n<\/div>\n<\/div>\n
\n
\n
from this hedge so to summarize we just<\/div>\n<\/div>\n<\/div>\n
\n
\n
got paid six thousand four hundred<\/div>\n<\/div>\n<\/div>\n
\n
\n
twelve dollars yet we simultaneously<\/div>\n<\/div>\n<\/div>\n
\n
\n
protected more than 75% of our profits<\/div>\n<\/div>\n<\/div>\n
\n
\n
profits on the Tesla shares with the<\/div>\n<\/div>\n<\/div>\n
\n
\n
only proviso being that if we hit our<\/div>\n<\/div>\n<\/div>\n
\n
\n
target profit on the trip on the trade<\/div>\n<\/div>\n<\/div>\n
\n
\n
we’ll sell our shares at our target<\/div>\n<\/div>\n<\/div>\n
\n
\n
which we would have done anyway and<\/div>\n<\/div>\n<\/div>\n
\n
\n
we’ll buy two hundred more shares at a<\/div>\n<\/div>\n<\/div>\n
\n
\n
price we love if it drops below the<\/div>\n<\/div>\n<\/div>\n
\n
\n
current level so even if all the options<\/div>\n<\/div>\n<\/div>\n
\n
\n
expire worthless we just got paid over<\/div>\n<\/div>\n<\/div>\n
\n
\n
six thousand dollars for this hedge<\/div>\n<\/div>\n<\/div>\n
\n
\n
remember you usually pay for hedges this<\/div>\n<\/div>\n<\/div>\n
\n
\n
is the reverse this is getting paid to<\/div>\n<\/div>\n<\/div>\n
\n
\n
hedge it’s amazing if you think about it<\/div>\n<\/div>\n<\/div>\n
\n
\n
but there’s more to this story let’s<\/div>\n<\/div>\n<\/div>\n
\n
\n
move forward now to March<\/div>\n<\/div>\n<\/div>\n
\n
\n
so on this day the market was getting<\/div>\n<\/div>\n<\/div>\n
\n
\n
pounded as it had been for the previous<\/div>\n<\/div>\n<\/div>\n
\n
\n
month since the middle of February and<\/div>\n<\/div>\n<\/div>\n
\n
\n
Tesla had dropped to about 400 more than<\/div>\n<\/div>\n<\/div>\n
\n
\n
500 points from where we had added this<\/div>\n<\/div>\n<\/div>\n
\n
\n
hedge so let’s take a look at what<\/div>\n<\/div>\n<\/div>\n
\n
\n
happened to our options pricing on that<\/div>\n<\/div>\n<\/div>\n
\n
\n
day so first of all with Tesla now bound<\/div>\n<\/div>\n<\/div>\n
\n
\n
403 understandably the right to buy them<\/div>\n<\/div>\n<\/div>\n
\n
\n
at 1060 those 1060 goals they have<\/div>\n<\/div>\n<\/div>\n
\n
\n
almost no value remember we got paid<\/div>\n<\/div>\n<\/div>\n
\n
\n
over $90 for those calls and now they’re<\/div>\n<\/div>\n<\/div>\n
\n
\n
worse worth less than two bucks and the<\/div>\n<\/div>\n<\/div>\n
\n
\n
820 puts that you bought for a little<\/div>\n<\/div>\n<\/div>\n
\n
\n
over $90 well thou sir those are now up<\/div>\n<\/div>\n<\/div>\n
\n
\n
over 400 more than quadrupling in value<\/div>\n<\/div>\n<\/div>\n
\n
\n
so you’ll also notice that the 650 puts<\/div>\n<\/div>\n<\/div>\n
\n
\n
have gone up a lot but as we will be<\/div>\n<\/div>\n<\/div>\n
\n
\n
taking no action on those at this time<\/div>\n<\/div>\n<\/div>\n
\n
\n
because our plan is to buy 200 shares<\/div>\n<\/div>\n<\/div>\n
\n
\n
more of Tesla if Tesla closes below 650<\/div>\n<\/div>\n<\/div>\n
\n
\n
anyway there’s no action to be taken at<\/div>\n<\/div>\n<\/div>\n
\n
\n
this point so what we can do right now<\/div>\n<\/div>\n<\/div>\n
\n
\n
is to close those four calls buying them<\/div>\n<\/div>\n<\/div>\n
\n
\n
back for almost nothing and closing<\/div>\n<\/div>\n<\/div>\n
\n
\n
those long puts at 8:24 a tremendous<\/div>\n<\/div>\n<\/div>\n
\n
\n
profit so let’s take a look at those two<\/div>\n<\/div>\n<\/div>\n
\n
\n
trades in isolation so as you can see as<\/div>\n<\/div>\n<\/div>\n
\n
\n
we mentioned before the original trade<\/div>\n<\/div>\n<\/div>\n
\n
\n
netted us positive cash flow of six<\/div>\n<\/div>\n<\/div>\n
\n
\n
thousand four hundred twelve dollars<\/div>\n<\/div>\n<\/div>\n
\n
\n
there was a small cost to closing those<\/div>\n<\/div>\n<\/div>\n
\n
\n
four calls because they shrunk so much<\/div>\n<\/div>\n<\/div>\n
\n
\n
so they did cost us a total of five<\/div>\n<\/div>\n<\/div>\n
\n
\n
hundred seventy two dollars to close but<\/div>\n<\/div>\n<\/div>\n
\n
\n
obviously that’s a small amount but take<\/div>\n<\/div>\n<\/div>\n
\n
\n
a look at the cash flow from selling<\/div>\n<\/div>\n<\/div>\n
\n
\n
those 820 puts we brought in over a<\/div>\n<\/div>\n<\/div>\n
\n
\n
hundred sixty seven dollars in cash from<\/div>\n<\/div>\n<\/div>\n
\n
\n
those four puts because the price of<\/div>\n<\/div>\n<\/div>\n
\n
\n
them had bloomed to four hundred<\/div>\n<\/div>\n<\/div>\n
\n
\n
nineteen dollars after all Tesla was<\/div>\n<\/div>\n<\/div>\n
\n
\n
trading at just over 400 so the right to<\/div>\n<\/div>\n<\/div>\n
\n
\n
sell them for 820 is obviously extremely<\/div>\n<\/div>\n<\/div>\n
\n
\n
valuable and the selling those puts at<\/div>\n<\/div>\n<\/div>\n
\n
\n
this stage locks in that huge increase<\/div>\n<\/div>\n<\/div>\n
\n
\n
in value on those puts so now the cash<\/div>\n<\/div>\n<\/div>\n
\n
\n
flow from just the options portion of<\/div>\n<\/div>\n<\/div>\n
\n
\n
the trade is up over a hundred seventy<\/div>\n<\/div>\n<\/div>\n
\n
\n
three thousand dollars and while they’ve<\/div>\n<\/div>\n<\/div>\n
\n
\n
lost value we still own those original<\/div>\n<\/div>\n<\/div>\n
\n
\n
400 shares of Tesla now let’s move<\/div>\n<\/div>\n<\/div>\n
\n
\n
forward to April 17th and you’ll see<\/div>\n<\/div>\n<\/div>\n
\n
\n
that tests are closed at 7:54 on the top<\/div>\n<\/div>\n<\/div>\n
\n
\n
options expiration day so remember in<\/div>\n<\/div>\n<\/div>\n
\n
\n
this case we’re still holding those 650<\/div>\n<\/div>\n<\/div>\n
\n
\n
puts but with Tesla closing at 754 they<\/div>\n<\/div>\n<\/div>\n
\n
\n
expire worthless why because what’s the<\/div>\n<\/div>\n<\/div>\n
\n
\n
value of the right to sell your shares<\/div>\n<\/div>\n<\/div>\n
\n
\n
at 6:50 the stock is trading more than<\/div>\n<\/div>\n<\/div>\n
\n
\n
100 points above that no one is gonna<\/div>\n<\/div>\n<\/div>\n
\n
\n
sell them 400 points below the market so<\/div>\n<\/div>\n<\/div>\n
\n
\n
those puts expire worthless so let’s<\/div>\n<\/div>\n<\/div>\n
\n
\n
examine what has happened here by<\/div>\n<\/div>\n<\/div>\n
\n
\n
pulling this all together so you’ll<\/div>\n<\/div>\n<\/div>\n
\n
\n
remember that when we wanted to put this<\/div>\n<\/div>\n<\/div>\n
\n
\n
hedge on Tesla was trading over 900 and<\/div>\n<\/div>\n<\/div>\n
\n
\n
so the total value of these shares was<\/div>\n<\/div>\n<\/div>\n
\n
\n
over three hundred sixty-four thousand<\/div>\n<\/div>\n<\/div>\n
\n
\n
dollars but by April 17th those shares<\/div>\n<\/div>\n<\/div>\n
\n
\n
had dropped in value as you can see by<\/div>\n<\/div>\n<\/div>\n
\n
\n
over sixty two thousand dollars but<\/div>\n<\/div>\n<\/div>\n
\n
\n
remember you would have made a huge<\/div>\n<\/div>\n<\/div>\n
\n
\n
profit by selling those 820 puts that<\/div>\n<\/div>\n<\/div>\n
\n
\n
you were long as the key part of this<\/div>\n<\/div>\n<\/div>\n
\n
\n
hedge and you were also able to close<\/div>\n<\/div>\n<\/div>\n
\n
\n
the short calls for almost nothing so<\/div>\n<\/div>\n<\/div>\n
\n
\n
there was a tremendous cash flow gained<\/div>\n<\/div>\n<\/div>\n
\n
\n
from the hedge of over one hundred<\/div>\n<\/div>\n<\/div>\n
\n
\n
seventy three thousand dollars so if you<\/div>\n<\/div>\n<\/div>\n
\n
\n
add it all up with the cash you would<\/div>\n<\/div>\n<\/div>\n
\n
\n
have made on the hedge and the drop in<\/div>\n<\/div>\n<\/div>\n
\n
\n
the value of you of your Tesla shares<\/div>\n<\/div>\n<\/div>\n
\n
\n
you would have come out way ahead<\/div>\n<\/div>\n<\/div>\n
\n
\n
so now after dropping Tesla your total<\/div>\n<\/div>\n<\/div>\n
\n
\n
trade is way up to a value of over four<\/div>\n<\/div>\n<\/div>\n
\n
\n
hundred seventy five thousand dollars<\/div>\n<\/div>\n<\/div>\n
\n
\n
putting it another way had you not<\/div>\n<\/div>\n<\/div>\n
\n
\n
bothered to put the hedge on at all your<\/div>\n<\/div>\n<\/div>\n
\n
\n
shares would have dropped from over<\/div>\n<\/div>\n<\/div>\n
\n
\n
three hundred sixty four thousand<\/div>\n<\/div>\n<\/div>\n
\n
\n
dollars to three hundred one thousand<\/div>\n<\/div>\n<\/div>\n
\n
\n
dollars but by utilizing the power of<\/div>\n<\/div>\n<\/div>\n
\n
\n
this hedge you not only were able to<\/div>\n<\/div>\n<\/div>\n
\n
\n
protect your position from at worst a<\/div>\n<\/div>\n<\/div>\n
\n
\n
25% loss in profits you would have been<\/div>\n<\/div>\n<\/div>\n
\n
\n
able to make a tremendous profit on the<\/div>\n<\/div>\n<\/div>\n
\n
\n
hedge itself so the overall gain on the<\/div>\n<\/div>\n<\/div>\n
\n
\n
trade exceeds the value it had before<\/div>\n<\/div>\n<\/div>\n
\n
\n
the hedge was put on in the first place<\/div>\n<\/div>\n<\/div>\n
\n
\n
prior to the drop and subsequent rebound<\/div>\n<\/div>\n<\/div>\n
\n
\n
of the Tesla<\/div>\n<\/div>\n<\/div>\n
\n
\n
shares so what is the huge lesson from<\/div>\n<\/div>\n<\/div>\n
\n
\n
this video well most traders think of<\/div>\n<\/div>\n<\/div>\n
\n
\n
hedges as a necessary evil a cost that<\/div>\n<\/div>\n<\/div>\n
\n
\n
if nothing bad happens you lose and if<\/div>\n<\/div>\n<\/div>\n
\n
\n
something bad does happen you still lose<\/div>\n<\/div>\n<\/div>\n
\n
\n
but not as much as you had had you not<\/div>\n<\/div>\n<\/div>\n
\n
\n
put the hedge on well with options that<\/div>\n<\/div>\n<\/div>\n
\n
\n
paradigm completely shifts as you can<\/div>\n<\/div>\n<\/div>\n
\n
\n
see from this example<\/div>\n<\/div>\n<\/div>\n
\n
\n
you not only can bring in cash flow<\/div>\n<\/div>\n<\/div>\n
\n
\n
initially with a properly structured<\/div>\n<\/div>\n<\/div>\n
\n
\n
hedge but you can end up cashing it in<\/div>\n<\/div>\n<\/div>\n
\n
\n
in a big way if you understand the<\/div>\n<\/div>\n<\/div>\n
\n
\n
nature of options trading now just to<\/div>\n<\/div>\n<\/div>\n
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\n
remind you as I said earlier if you<\/div>\n<\/div>\n<\/div>\n
\n
\n
enjoyed this video and learned something<\/div>\n<\/div>\n<\/div>\n
\n
\n
valuable from it would like to learn the<\/div>\n<\/div>\n<\/div>\n
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details of three real-world option<\/div>\n<\/div>\n<\/div>\n
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strategies that professional options<\/div>\n<\/div>\n<\/div>\n
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\n
traders use all the time then you should<\/div>\n<\/div>\n<\/div>\n
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\n
check out the free options class that<\/div>\n<\/div>\n<\/div>\n
\n
\n
we’re currently running just go ahead<\/div>\n<\/div>\n<\/div>\n
\n
\n
and click the link that should be<\/div>\n<\/div>\n<\/div>\n
\n
\n
appearing now at the top right corner of<\/div>\n<\/div>\n<\/div>\n
\n
\n
your screen that will open the free<\/div>\n<\/div>\n<\/div>\n
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\n
registration page in a new window so you<\/div>\n<\/div>\n<\/div>\n
\n
\n
won’t lose this video don’t worry or you<\/div>\n<\/div>\n<\/div>\n
\n
\n
can just head on over to options class<\/div>\n<\/div>\n<\/div>\n
\n
\n
comm to register for this free intensive<\/div>\n<\/div>\n<\/div>\n
\n
\n
workshop it really is a rare opportunity<\/div>\n<\/div>\n<\/div>\n
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\n
for retail traders and investors to<\/div>\n<\/div>\n<\/div>\n
\n
\n
learn directly from Wall Street traders<\/div>\n<\/div>\n<\/div>\n
\n
\n
but that’s exactly what you’ll be<\/div>\n<\/div>\n<\/div>\n
\n
\n
getting through this free online<\/div>\n<\/div>\n<\/div>\n
\n
\n
workshop so click the link to sign up<\/div>\n<\/div>\n<\/div>\n
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\n
now and don’t miss it and please don’t<\/div>\n<\/div>\n<\/div>\n
\n
\n
forget to click on the subscribe button<\/div>\n<\/div>\n<\/div>\n
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\n
right now so you won’t miss free trading<\/div>\n<\/div>\n<\/div>\n
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\n
videos that we’re posting constantly on<\/div>\n<\/div>\n<\/div>\n
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\n
our channel to help you to improve your<\/div>\n<\/div>\n<\/div>\n
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\n
game as an options trader<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n
\n
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<\/div><\/div>\n<\/div>\n<\/div>\n

\"\"<\/a><\/p>\n

* no relevant positions<\/p>\n","protected":false},"excerpt":{"rendered":"

Options strategies can be used to protect large equity trading profits for bullish traders who are concerned about a market downturn. In this video, we give you a compelling example of how traders can use a technique originally designed to protect equity trading profits into a powerful profit center to enhance gains on long positions even as the market is … Read More<\/a><\/p>\n","protected":false},"author":290,"featured_media":49832,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[4189],"tags":[],"class_list":["post-49831","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-free-daily-trading-video","post_format-post-format-video"],"yoast_head":"\nHow To Make Large Profits From Options Hedges | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/how-to-make-large-profits-from-options-hedges\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How To Make Large Profits From Options Hedges | SMB Training\" \/>\n<meta property=\"og:description\" content=\"Options strategies can be used to protect large equity trading profits for bullish traders who are concerned about a market downturn. In this video, we give you a compelling example of how traders can use a technique originally designed to protect equity trading profits into a powerful profit center to enhance gains on long positions even as the market is ... 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