15. Hedging with Options

Sy Spector: “Bill said you used to be with the Secret Service.”

Frank Farmer: “That’s right.”

Sy Spector: “Ever guard the main man?”

Frank Farmer: “I was two years with Carter, four with Reagan.”

Sy Spector: “Reagan got shot!”

Frank Farmer: “Not on my shift.”

—From The Bodyguard (1992)

As mentioned earlier, hedges are designed for protection, and the degree of protection can be customized to the investor’s preference. Defensive hedging means that some kind of negatively correlated position will reduce or completely offset losses if the market moves opposite of your investment bias. Many times we talk about absolute hedges. These are investments where, after a specific price point, your losses stop accumulating. This is ...

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