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Browse Topics:    Trading Strategies    Research & Analyze    

Trader Q&A: How Can I Hedge Against Near-term Volatility?

Kevin Horner talks with Theresa Carey, columnist at Barron's, about how to hedge against upcoming events when concerned about near-term volatility.

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Lou Mercer: Excellent. I'm here again with Kevin Horner and our special guest, Theresa Carey, "Digital Investor" columnist at Barron's. We're going to be talking about some of the hot topics for traders right now. All right. Let's keep going. Lester from Texas, what should traders who are concerned about near term volatility do to hedge against upcoming events? And I know Randy will be on here in a little bit.

Theresa Carey: Right.

Lou Mercer: I know that you do a little bit with covered calls.

Theresa Carey: We're going to be talking about that a lot. Yeah.

Lou Mercer: But if it's a known event, Randy likes to really discuss the option collar, or buying protection, right? So you're buying those put options, and then you're going to sell some upside premium or sell a covered call to help finance that put. And the big point that Randy always likes to point out is it's the known event that you can hedge for. Where you get in trouble is if you're just worried. And I saw this in 2013.

Theresa Carey: Yeah.

Lou Mercer: People were saying, hey, Lou, the market's up. I want to get out. And it's, oh, okay, but then what? What if it keeps going up?

Theresa Carey: Then what you going to do? Exactly.

Kevin Horner: Right.

Lou Mercer: So they said, okay, Lou, well, I want to buy some insurance. And I said, okay, well, what's this event that you're trying to protect?

Theresa Carey: I don't know.

Lou Mercer: I'm scared, right?

Theresa Carey: Yeah.

Kevin Horner: I'm just scared.

Lou Mercer: And it's tough to always protect being scared. It's too expensive. On a million dollar portfolio, I think it'll –

Kevin Horner: Totally agree.

Lou Mercer: – cost you ten percent.

Theresa Carey: A lot. Yeah.

Lou Mercer: And then you still can lose ten percent on that. So –

Kevin Horner: Yeah, I think that's absolutely right. That's certainly something that concerns a lot of people at this point. I like the idea of going in with known events. Don't assume negativity just for the sake of negativity, I guess.

Lou Mercer: Yeah.

Theresa Carey: The other thing I think people – options traders, anybody who's trading on that level, that they have to be careful about, is not generate – is not creating a wash sale. And they can inadvertently create one. This happens especially to people who have accounts at different brokers. You could – and the IRS doesn't care that you made a trade at Schwab and you made this other trade at a different broker. It could still create a – because they just look at your whole list of trades.

Lou Mercer: Right.

Theresa Carey: It still could create a wash sale. So for people – and options transactions fall into those, too. And so for people who trade a lot, I recommend that they go take a look at Robert Green's website. He has a site where he has – puts out a tax guide for traders that I think is excellent.

Lou Mercer: Oh, that's great.

Theresa Carey: And a really – he also has a tax prep software package called Green Trader Tax that's terrific, and good for people who trade a lot.

Lou Mercer: Yeah, and if you want some more on options and how to hedge yourself, Nina, I know she does a great job doing a lot of the workshops at Schwab's and Options Express. I would encourage you to take a look at some of her content. So what is that lesson that you would like to share for self-directed investors to really watch out for?

Theresa Carey: The lesson. There's so many. The – it's mainly to swallow your fear and use these screening tools, use – find an area of the market where you're comfortable, and just focus on that for now. If the whole – if the broader market scares you, then control it. You have to control what you can control –

Lou Mercer: Yeah.

Theresa Carey: – is what we say in volleyball, and the things that are out of your control, you just let them go. And so stay on the things that you can control.

Lou Mercer: And going back to volleyball as well, you're going to have a plan coming in and understand that things might happen and react to it. But without a plan –

Theresa Carey: You might have to work out a system.

Lou Mercer: – it's going to be very difficult.

Theresa Carey: Yeah.

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