Hedging For Disaster – 3 More Option Plays that Make 300% if the Market Falls – Members Only

It's been a long time since we were worried about a steep drop.

We have some very successful hedges already as I've been pounding the table on all week and the DIA June $148 puts I mentioned Thursday at .60 closed at $1.04 (up 73% in 2 days!) while the DIA Aug $147 puts I suggested rolling to went from $1.72 to $2.50 – so, "only" up 45% but up .78 rather than .44 and, with 100 contracts, that's a $3,400 difference!  The longer-term TZA October $30/37 bull call spread did little, going from $1.90 to $2 but now, if we take the DIA profits on 100 calls off the table with a $7,800 profit, that knocks $2.60 of each of the 30 TZA spreads and drops the basis to a net 0.70 credit with an upside of 3,000 x $7 or $21,000 (1,100% with the credit).

That's how we play the option insurance gain.  We take the quick, directional profits off the table and leave the long-term hedges, that pay the big bucks, on the table, in case the market suffers a sustained downturn and, if not, it's very cheap insurance and we'll easily be able to stop out the now $2 spread before it hits $1 for a profitable exit, ready to reload for the next round of insurance plays.  

Since there is so much money in this kind of insurance, we don't need to pull the DIA puts immediately off the table.  We can set a stop on 1/2 $2.30 and a stop on the other half at $2 and we lock in a gain of no less than $4,300, that still leaves us with a net of .47 on the $7 TZA spreads, still with a potential gain of $19,590 if the Russell falls 5% to 934.  Note that there's no margin requirements to this kind of trade – these simple hedges can be applied to any portfolio (in proportion, of course!).  

You know I am a big fan of taking cash off the table in either direction, let's not be greedy and look at ways to "roll" our downside profits into new protective plays so we can set SENSIBLE stops on our in the money short plays (very similar to our Mattress Strategy).  I hate to have to repeat these warnings over and over again but days like yesterday make it all worth…