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LivestreamMenuLast Friday was a good reminder of why hedging exists. The QQQ ETF that tracks the Nasdaq-100 dropped 4.8% in a single session, volume hit three times its normal daily level and options positions that looked comfortable on Thursday morning were suddenly down 30-60%. That kind of day is not unusual, it just feels that way when you are not prepared for it. Today I want to walk through a hedging structure I have been running alongside my algorithm, Maya , for more than a year: the QQQ put spread. Before I get into the mechanics, I want to be clear about something upfront. A hedge does not cancel your losses. What it does is put a meaningful floor under your worst-case scenario while keeping your cost of protection manageable. Those are two very different things, and the distinction matters. What’s a QQQ Put Spread Hedge A put spread pairs two positions: you buy a put at one strike and simultaneously sell a put at a lower strike with the same expiration. The put you buy gains value as QQQ falls. The put you sell at the lower strike caps your maximum profit but dramatically reduces what you pay to enter the position. Without that second leg, buying outright puts to hedge a portfolio gets expensive fast, particularly when volatility is already elevated and everyone else has the same idea. The specific setup I use targets roughly 40 days to expiration, with the long put sitting about 3% below QQQ’s current price and the short put about 8% below. Right now, with QQQ trading near $705, that means buying the $685 put and selling the $650 put, a $35-wide spread targeting the July expiration cycle. There are three things I look at before opening the hedge: 1. VIX level This is the first filter and the most important one. I do not open new hedges when VIX is above 20. Once VIX is elevated, put premiums have already expanded and you are paying crisis prices for protection against a crisis that may have already started. The right time to buy protection is when the tape is calm and VIX is sitting in the 13-16 range. That feels backwards, but it is exactly correct. Anyone who had a put spread open heading into last week (when VIX was still in the 14-16 range through Wednesday and Thursday) saw it pay out on Friday. Anyone trying to open one for the first time on Friday afternoon was paying 3x the premium for protection that already had a head start. 2. Long delta My algorithm trades long call spreads exclusively, which means the entire book is long delta. Every open position benefits when the market goes up and gets hurt when it goes down. I size the hedge relative to how much long delta exposure I am carrying at any given time. A portfolio with 15-20 open long call spreads carries meaningfully more aggregate downside risk than one with 3-4. I scale the hedge contract count accordingly rather than running a fixed size regardless of exposure. 3. Recent market structure There are two ways I think about this. The first is seasonality. Historically, February, August and September are the weakest months of the year for equities. If you are running a long delta book heading into late summer, that is a natural window to make sure protection is in place before the calendar does the work for you. The second is overbought conditions. QQQ has been overbought, as measured by the relative strength index, or RSI, since April 15. When a market grinds higher for weeks without a meaningful pullback, that is not a reason to avoid trading but it is a reason to have a hedge working. Extended overbought readings do not predict exactly when the pullback happens, but they do tell you that when it comes, it is likely to be sharp. Last Friday was a good example of that playing out. What Friday looked like with a hedge on Here is a concrete example. A trader running a QQQ 725/690 put spread opened the week of May 26 (when VIX was at 15 and QQQ was near $746) would have paid approximately $5.50 per share, or $550 per contract. On Friday June 5, QQQ broke through the long strike ($725) within the first 90 minutes of trading. The long put went in the money while the short put stayed well out of the money, and by midday the spread had more than doubled in value. The 50% profit target fired automatically at roughly $8.25 per share, closing the position for $825 per contract and booking a $275 gain. On a 2-contract position that is $550 back in your pocket on a day where your call spread book was absorbing $1,000-$1,500 in losses. It does not make the day green. What it does is take the edge off and let you stay composed rather than reactive. That difference compounds over time. ‘Bull market insurance’ objection A lot of traders tell me the hedge feels like burning cash in a good year. I understand the instinct, but the math does not support it. Over the last 12 months I tracked every period where QQQ fell at least 2% from where it was 7 trading days earlier. There were 12 distinct episodes, including the February tape breakdown, the March Iran-related grind and last Friday’s 3.3% weekly drop. That is roughly once a month, in a period that included several strong bull runs. Some of those episodes were shallow and brief. Others ran as deep as 5-6% over the week. The point is they showed up consistently, month after month, whether or not the broader market finished the quarter positive. — Nishant Pant DISCLOSURES: None All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.Read More
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