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Failing Thursday - Hedging For The Next 10% Correction

Philip Davis profile picture
Philip Davis


  • Our hedges are paying off, up $6,620 yesterday.
  • Are we hedged enough if this market turns REALLY ugly?
  • Do investors still have nowhere else to go but equities?

This is getting to be fun, right? We shorted the Nasdaq at 7,000 on Tuesday morning and, we strategized shorting the Dow at 25,500, which paid $2,500 per contract and the S&P at 2,750, which also paid $2,500 per contract. Now we'll see if the rest of our prophesy plays out:

"...if the S&P can't hold that 2,750 line - next stop is 2,735 and below that is DOOM!!!"

DOOM!!! in this case is the 200-day moving average, all the way down at 2,557 but there should be interim support at 2,640, which is the 20% line on the Big Chart so we'll take short profits there and look for a bounce. We're certainly not going to be bullish again until those 50-day moving averages are retaken and keep that in mind for next time when we urge caution.

As we expected, our Short-Term Portfolio, which was $116,777.50 yesterday morning, jumped to $123,397.50 for a gain of $6,620 as our DIA June $255 puts moved back into the money and SQQQ climbed back over $15. But those trades "only" provide $100,000 and $40,000 worth of protection, respectively, so it's time to consider the next layer of hedges - just in case this drop doesn't stop at the previous lows.

One thing we can do with DIA that doesn't cost much is to add a more speculative spread. Our June $255 puts were at the money when we bought them and we sold 1/2 as many June $230 puts, capping our gains a bit but what if we added the Sept. $240 ($8.50)/225 ($5.50) bear put spread for $3? 20 more of those is just $6,000 and gives us $60,000 worth of protection if the Dow drops 20% and, more importantly, it lets us take a profit on the $255 puts off the table (when we decide to) and then becomes a cover for the short June $230 puts in

This article was written by

Philip Davis profile picture
Philip R. Davis is a highly respected options trader, entrepreneur, and founder of philstockworld.com, one of the most influential stock and options trading sites on the web. With over 20 years of experience in the financial industry, Mr. Davis has earned a reputation as a trusted authority on options trading, equities, and macroeconomic trends. As the creator of Phil's Stock World, Mr. Davis has built a vibrant community of traders and investors of all levels, providing them with unparalleled insights, analysis, and trading ideas. Whether you're a beginner or a seasoned pro, Phil's Stock World offers valuable resources that can help you navigate the complexities of the financial markets and achieve your investment goals. With a unique approach to teaching the art of options trading, Mr. Davis and his team of expert contributors including Optrader, Sabrient, Income Trader, Trend Trader, and Warren the Trader AI provide members with live chat sessions during trading hours, real-time trade alerts, and in-depth technical and fundamental analysis of hundreds of stocks. In addition to his role as an options trader and financial guru, Mr. Davis is a serial entrepreneur and founder of several successful companies, including Accu-Title, a real estate title insurance software solution, and Personality Plus, a precursor to eHarmony.com. He is also the President of Delphi Consulting Corp., an M&A consulting firm that helps companies of all sizes obtain funding and close deals. With his unique blend of wit, humor, and financial acumen, Mr. Davis is a sought-after speaker on options trading and financial markets. His writing style is both entertaining and informative, providing readers with specific and actionable trade ideas, as well as deep insights into the macroeconomic forces that drive market trends. In short, if you're looking for a trusted and experienced options trader and financial expert, Philip R. Davis is the real deal. Join the growing community of traders and investors at Phil's Stock World, and start profiting from his insights and analysis today.

Analyst’s Disclosure: I am/we are long SQQQ, AAPL, TZA, SDS, DXD, LQMT, FTR.

Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bearish mix of long and short positions - see previous posts for other trade ideas).

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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