Compare
| Hedge Instrument | What It Hedges | Cost | Complexity |
|---|---|---|---|
| Put options | Downside equity risk | Premium (2–5% annually) | Low |
| Inverse ETFs | Broad market decline | Tracking error, daily reset | Low |
| Futures | Directional exposure | Margin, roll costs | Medium |
| Interest rate swaps | Rate risk on debt | Swap spread | High |
| Collar (put + covered call) | Downside protection funded by capping upside | Net zero or small credit | Medium |
Key point
The best time to hedge is when it’s cheap (low IV, calm markets), not when everyone else is panicking (high IV, expensive premiums). Hedging after a crash is like buying fire insurance while the house is burning.
Try it
Check the cost of a 10% OTM put on SPY with 3 months to expiration. That’s the price of portfolio insurance for one quarter. Is it worth it to you?
Check-in
You can hedge your $1M portfolio with puts costing 3% annually ($30K). Your expected return is 10% ($100K). Should you hedge?
Key insight
Check-in
You hold $10M equity exposure. Stocks are volatile but long-term positive. Cost to hedge with 1-year ATM puts: $800K (8%). Disciplined response?
Check your understanding
Sit with the ideas.
You hold $500,000 in energy stocks and are worried about a near-term oil price decline, but you believe these companies will outperform over the next two years. What is the most efficient hedging approach?
Why: