How to Hedge With Vertical Put Spreads

I always say it's better to have insurance before your house burns down rather than try to buy it as it's burning down. This can also be said when talking about purchasing insurance or put options to hedge an equity portfolio.

With the market up over 25% since early July and the market being quite complacent lately, volatility is relatively cheap making portfolio insurance or put options also relatively cheap. Many have been stating the market is overdue for a pull back, and I also believe a correction could occur whether it be worse than expected economic data in the United States, some bad news out of Europe or Asia, or even another flash crash that spikes fear in the markets, who knows what excuse the market will use to pull back, but it will likely find one soon as we all know trees don't grow to the sky. Another thing to remember is the more we rally before any type of pull back, the worse the pull back will likely be. A 25% move higher in just 6 months is certainly a gift and some of the profits made in the recent months should be set aside to hedge out the next few months, as I stated the greater the rally - the greater the correction is typically.

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