Hedging strategies
Each strategy below answers the same questions: when protection starts, where it stops, whether upside is limited, and what it costs.
| Strategy | Starts protecting | Stops protecting | Upside | Cost |
|---|---|---|---|---|
| Protective put | At the put strike | Does not stop | Open, less the premium | Known, paid up front |
| Collar | At the put strike | Does not stop | Capped at the call strike | Little or none up front; gains above the cap |
| Put spread collar | At the higher put strike | Below the lower put strike | Capped at the call strike | Little or none up front; gains above the cap |
| Covered call | Only by the premium received | Just past the premium | Capped at the call strike | None up front; gains above the cap |
| Bonds | Depends on the cause of the decline | When stocks and bonds fall together | Lower long-run growth | Return given up versus stocks |
| Diversification | Always, partially | When everything falls together | An average of the parts | Return given up versus the best performers |
| Trend following | After a decline is under way | In sudden drops and fast rebounds | Can lag after rebounds | Unknown: false signals, trading costs, taxes |
Options overlays
Options added on top of a portfolio you already own. Each shape shows the portfolio at the end of one year against the market's move.
Protective put
Buy a put below today’s level. A floor with open upside, paid for up front.
Collar
Buy a put, sell a call to pay for it. A floor and a ceiling.
Put spread collar
Protection that starts sooner but covers only a band of losses.
Covered call
Sell a call for income. Caps gains and keeps most of the downside.
Portfolio approaches
Ways of building the portfolio itself to soften losses, without options.