Monday Market Movement – Hedging for Disaster

Wheeeee – we love a good sell-off.

Especially when we're expecting it, right?  Last week, in our September Portfolio Review, we suggested a new hedge to prepare for the coming sell-off.  It was a more aggressive hedge than we usually take because our sense of doom was growing stronger and we didn't feel we had enough protection for our Long-Term Portfolio.  The hedging play was:

  • Buy 50 (more) TZA Jan $30 calls for $3.15 ($15,750) 
  • Sell 50 (more) TZA Jan $40 calls for $1.70 ($8,500) 
  • Sell 5 TSLA Jan $250 calls for $4.70 ($2,350) 
  • Sell 5 AMZN Jan $900 calls for $8 ($4,000) 

It says 50 more because we already have the spread.  The net cost of our addition was just $900 in cash plus the margin on the short calls and the position pays back, if the ultra-short Russell ETF (TZA) is over $40 in January, $50,000 back for a $49,100 profit.  

Of course, you don't have to wait until January to make some good money on hedges.  After just a single day's sell-off, already the Amazon (AMZN) Jan $900 short calls have fallen to $6.40 ($3,200) and the Tesla (TSAL) Jan $250 short calls are down to $2.60 ($1,300) while the TZA Jan $30 long calls have jumped to $3.85 ($19,250) and the TZA Jan $40 long calls are now $2.15 ($10,750) for a current net of $4,000, which is already up $3,100 (344% on cash) in just one week

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