Download the Schwab app from iTunes®Get the AppClose

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.

Click to show the transcript

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.

Schwab has tools to help you mentally prepare for trading

Learn more >

Talk trading with a Schwab specialist anytime.
Call 888-245-6864
M-F, 8:30am - 9:00pm EST

Get 500 Commission-Free Online Equity and Options Trades for Two Years

Learn More >

Important Disclosures

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled “Characteristics and Risks of Standardized Options” before considering any option transaction. Call Schwab at 1-800-435-4000 for a current copy or access online at: The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Past performance is no indication (or "guarantee") of future results. Schwab does not recommend the use of technical analysis as a sole means of investment research. Schwab Trading Services™ includes access to StreetSmart® trading platforms, the Schwab Trading Community, and Schwab trading specialists (a Schwab brokerage account is required). There are no fees to use Schwab Trading Services. Other account fees, optional data fees, fund expenses, and brokerage commissions may apply. Schwab reserves the right to restrict or modify access at any time. Schwab brokerage account online applications that have the “Schwab Trading Services” box checked will automatically be enrolled. For questions, call 888-245-6864 to speak to a Schwab Trading Services representative. Theresa Carey and Barron’s are not affiliated with Charles Schwab & Co., Inc.


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.