What is the best way to hedge equity options?

Question

I guess to clarify, I usually just buy options (calls/puts) w/o having the underlying security. I guess I want to hedge the options so that I can protect it against time decay and any other unforseen events. Should I pair it with VIX?

Answer 1

Do you mean as a writer (seller) or buyer? As a buyer, and you are not speculating on a price movement, typically the options are used for hedging. I suppose you could look at it the other way around, Say, if you are long a put and long the underlying security you could say that your put is hedged. As a writer you are obviously fully hedged as long as you are long the underlying securities. Now, when it really becomes interesting is when you start looking for ways to hedge naked options. And, frankly, if anyone really knew, they probably wouldn't tell you. Because that would be a way to make insane money. Not that lots of esoteric strategies don't exist, such as putting opposite calender spreads together in what is called an iron condor and on and on. But, again, if someone really knew they probably wouldn't tell you.

Good luck figuring it out. You'll get extremely rich if you do.

I just check back to see if anyone else might know the answer to your question. And what Matthew C is talking about has nothing at all to do with hedging. He's describing covered writing.

Answer 2

I believe you are asking how to hedge with options. You buy some stocks. As the price move up and when you feel that it has hit the highs you write similar amount of options. Now since it is high the market will come down and you can pocket the premium on options. When the market comes down you buy some more of the stocks. This way you will gain again when it goes up. Continue like this and you will have profits all the way hedging for downward movements.