VIDEO: Short Put in Trouble? Uncle Tony's 4 Hedging Strategies for a Falling Market
How to Survive, Repair, and Stay in the Game
Tactical Hedging in a 10% Drawdown Market
How to Survive, Repair, and Stay in the Game
This morning, I joined tastylive with Jenny Andrews to break down tactical hedging strategies in a market that’s already experienced a meaningful ~10% drawdown.
The key message was simple: hedging is never free. You either pay for protection or take on additional risk somewhere else. The goal is not perfection—it’s survival and capital management.
Below are four practical frameworks we discussed for navigating downside pressure:
1. The “Troubled Put” Repair (Downside Ratio Spread)
When a short put moves against you, the instinct is often to panic or close. Instead, you can restructure the trade to define risk and buy time.
The idea: “Engulf” the losing position inside a wider structure.
Example structure:
Buy 1 higher-strike put (above the troubled position)
Sell 1 put below your breakeven
Sell an additional further OTM put (near expected move)
What this does:
Creates a defined-risk spread around the losing strike
Brings in net credit to offset losses
Trade-off: introduces additional tail risk further down
This is not a bailout—it’s a controlled repositioning of risk.
2. The “Margin Call Survivor” (Deep ITM Put)
Sometimes the problem isn’t the trade—it’s buying power pressure.
The idea: temporarily reduce margin requirements without closing positions.
Execution:
Buy a deep ITM put (very little extrinsic value)
Why it works:
Acts as a synthetic hedge
Reduces portfolio margin requirements immediately
Buys you time (24–48 hours) to react
Think of this as a bridge strategy, not a long-term solution.
3. The “Extrinsic Washer” Call Spread
This is a more advanced, non-intuitive hedge.
The idea: extract premium from deep ITM calls to offset downside losses.
Execution:
Sell a deep ITM call
Buy an OTM call with similar extrinsic value
Outcome:
Generates a large upfront credit
If market continues lower → you keep the credit
If market rallies → capped loss, but portfolio likely recovers
You are effectively trading convexity for cash flow.
4. The “Valley of Death” (Short-Term Crash Hedge)
Designed for fast, violent downside moves.
Structure:
Sell 1 ATM put
Buy 2 OTM puts (lower strikes, short DTE ~7 days)
Behavior:
Flat to small gain if market rises
Explosive protection if market crashes
Risk zone (“Valley of Death”): small declines where structure loses
This is a convex hedge—cheap most of the time, powerful when needed.
Long-Term Approach: The “Forget About It” Hedge
For longer-term positioning, the idea is to build a structural hedge that works in the background.
Framework:
Sell deep ITM calls far out in time (e.g., SPX)
Use that “call wall” to justify selling shorter-term premium (puts)
Goal:
Generate consistent income
Maintain a defined risk ceiling on the upside
Let time decay work in your favor
This is more of a portfolio architecture decision than a tactical trade.
Final Thought
Every hedge comes with a cost—either:
Cash (premium paid)
Opportunity (capped upside)
Risk (added tail exposure)
Your job as a trader is to decide which cost you’re willing to accept.
Disclaimer
This material is for informational and educational purposes only and reflects personal opinions based on trading experience. It is not intended as investment advice, a recommendation, or a solicitation to buy or sell any securities or derivatives. Options trading involves substantial risk and is not suitable for all investors. Strategies discussed may involve complex risks, including the potential for significant losses. Past performance is not indicative of future results. Always consult with a qualified financial professional before making any investment decisions and ensure that any strategy aligns with your individual financial situation, risk tolerance, and objectives.