The hedging trap that catches you in month four
Hedging a long-only book sounds simple until you've been doing it for three months and the market has only gone up.
Your hedges have bled. Your long-only has made money. Your brain starts whispering "I'm wasting premium."
That's the moment you have to zoom out.
Four steps to stay honest.
Step 1. Decide upfront that hedging is a system. You make the call in advance, with a clear head, when premium is reasonable. The worst time to put on a hedge is the day you decide you need one.
Step 2. Accept the months where the hedge bleeds and the long-only delivers. That's the design. The hedge is the cost of being able to stay invested without panicking on every pullback.
Step 3. Roll the strike up to where it actually matters. As the market rallies, your old strike drifts too far below spot to do any work. Move it up so the floor is meaningful again at the new price.
Step 4. Lighten the hedge ratio when your conviction is strong and premium feels expensive. Keep some protection in the book even at low conviction.
The worst version of this trade is quitting in month four right before the drawdown that justified the whole framework.
Imran
Disclaimer (Your Gains & Losses, Your Responsibility): This content from Options Insight LLC (“Options Insight”) is for educational purposes only and does not provide individual investment advice or recommendations, nor should it be considered an offer to buy or sell any security. All information is general and not tailored to your specific objectives, financial situation, or risk tolerance. Employees of Options Insight may hold positions in the assets discussed. While we use sources believed to be reliable, we are not responsible for errors, omissions, or losses resulting from reliance on this content. Always consult a licensed investment professional.
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