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May 29th, 2017 at 4:46 pm
Hedging trades for the Nasdaq:
They wanted 3 ways to hedge so:
Nasdaq 100 Futures (/NQU7) are at 5,796 and pay $20 per point per contract, shorting 1 Sept contract protects your portfolio through the summer and you can set a stop over 5,800, where you'd have an $80 loss but a 10% drop in the Nasdaq of 578 points would pay $11,560. Good to use any time you get nervous.
Using the Nasdaq ETF (QQQ) you can lock in your gains at $141.22 by buying 10 Jan $147 puts for $9.75 ($9,750) and selling 10 Jan $136 puts for $5.05 ($5,050) for net $4,745 on the $11,000 spread. That's an upside of $6,255 (131%) if the Nasdaq drops 5 points (3.5%). As a rule of thumb, we put about 1/3 of our unrealized gains into our hedges to lock them in.
The Nasdaq Ultra-Short ETF (SQQQ) is a 3x inverse ETF at $30.36 so a 10% drop in the Nasdaq would move the index up about 30% to $40. In this case, we would want to take a bull call spread, like 20 Jan $35 calls for $3.25 ($6,500) and sell 20 Jan $40 calls for $2.70 ($5,400) for net $1,100 on the $10,000 spread. The upside potential here is $8,900 (809%) if the Nasdaq falls 10%.
In both cases, I like to offset the cost of the hedge with a bullish position on a stock I wouldn't mind buying if it got 10% cheaper. We already have a bullish position on GILD so let's add to it and sell 5 GILD 2019 $55 puts for $4.90 ($2,450) and that nets us into 500 shares of the stock at just $50.10 ($25,050) if assigned, $14.40 – 22% below the current $64.50 price.