 Hey everybody, it's Hari Swaminathan. Welcome to the free course library in this mini course We are going to look at how you can hedge a your portfolio With one spider trade So let's back up a little and see why we would need to use this in the first place so let's say we add a portfolio of Which is a combination of stocks as well as options. So as you can see here Apple I have some stock. I have 200 shares Shows a little bit of profit. I have Amazon which is options. We have a call spread here Has a bit of loss and then same thing on FedEx Google. We have some options positions So, you know, a normal portfolio might look like something like this you have a few stocks you might have a couple of options positions and now you're concerned that The overall market might take a Downward trend for whatever reason so, you know as of now in the middle of August We are looking at the Russia Ukraine crisis And so you have this portfolio. You don't want to close everything out But you want to position yourself In such a manner that even if the markets take a crash either next week or any time Your portfolio is not going to get affected a whole lot. So the way you do that is You can see now in terms of your Delta, you know options I mean stocks have full hundred Delta So basically if you have 200 shares you have 200 Delta because if the stock goes up by one dollar Then you know your Apple shares will be up by $200 because you have 200 shares But options are different. You're depending on which strike price you have Your deltas are going to be different. So if you just looked at the raw deltas You have 200 deltas on on Apple. You have 154 on Amazon You have 131 on FedEx and 108 on Google But the deltas of all these stocks are not the same So, you know, the Apple Delta is not the same as Amazon Delta So one Delta on Apple is not the same as one Delta on on Amazon because both have different correlations to the overall market and so you would want to beta weight this portfolio To the spider, which is the overall market So by when you beta weight the concept of beta weighting is that each individual stock has its own beta Which is the correlation to the overall markets And so when you beta weight it to say the spider Then what you're doing is you're reducing every stock and It's beta you mean the the platform obviously calculates all of this for you but the platform will calculate the beta of each of the stocks in this portfolio and It will take its beta into account and it will reduce it to a common Spider level Delta. So basically if we do this if I beta weight it Now you can see in terms of the spider. We would need 861 deltas on the spider So which means we can now come to the spider and say so if you wanted, you know, we have positive 861 delta so if you if we wanted to beta weight this and Make it delta neutral on the spider We would have to buy a certain amount of spider put options We would buy put options because we have positive delta here and therefore to neutralize it You would want to buy the spider put options. So let's go take a look at the spiders and let's say we wanted To protect to give it protection of let's say about a month or so so let's go into the September series and You use you you want to buy a certain amount of spider put options So that it equals to 861 negative delta. So, you know, let's say we wanted to buy the 190 put so the spiders are at 195. So let's say we wanted to buy the 190 put and you can see if you buy 10 contracts of the Spider puts you would get 255 delta So perhaps we want to buy about 32 Maybe so that we get 861 so we might want to you know, you want to check that and See how you get it 843 So I think the right amount would be about 34 spider put contracts of the 190 put option that gives you negative 869 deltas just from the spiders and If you look at your position, you have 861 positive deltas and this will give you 869 negative deltas. So you'll be negative by about six or seven deltas, which is perfect So now how much would this cost? This would cost about let's say with the option is going for 1.4 So $1400 so about $4,500 if you spend $4,500 on The spider put options you can completely Hedge your entire portfolio. So obviously your entire portfolio is probably worth a lot more. You can see it's worth About $27,000 so spending $4,500 to protect this overall portfolio is not bad and and it doesn't mean that whatever you spend on the spiders is Going to go away. It's not going to go down to zero First of all if the markets crash like you fear that it that it might then these put options actually going to be profitable and Not only that if over a period of the next few days say five to seven days if the Risks in the market go away. So in which case then you don't need these options any longer Then you can perhaps even sell them Maybe for even for a small profit if the spiders have gone down a little bit You know these put options might increase in value Even if it does not increase in value and it goes down a little bit It has served the purpose of hedging your overall portfolio So you can always beta weight your entire portfolio to anything You can if you have nasdaq stocks, which is which is most of these stocks are nasdaq So perhaps you want to beta weight it to the Nasdaq ETF and now you can see you you know, you need actually 1624 deltas when you when you beta weight it to the nasdaq. So you want to see you want to take a look at your portfolio and Decide which index it is that you would need to beta weight your portfolio on and Because that's critical. So in fact in this case, you would not come to the spider You would come to the qqq because all of your all of the stocks are Nasdaq stocks except for FedEx all the others are nasdaq stocks. So you would want to come and actually beta weight your portfolio hedge it with a With the qqq. So here you can see actually you're going to be spending less contracts I mean you'll need about less contracts. So let's say let's put 25 and There we go. We have 837 negative actually may not that's not true you would need 1600 in this case and if you see 1624 and This gives you 1674 gives you a little bit more. So perhaps you can just do about 45 contracts Let's see. That's too less. So maybe about 47 contracts on the qqq Or maybe 48 And this would approximately hedge your portfolio On the queues because most of these stocks are nasdaq stocks So you would want to hedge it against the queues and so this again, you would spend Around the same amount you would spend about 4500 4600 on this And of course you can close out this hedge at any time But the important thing is you when you want to know how many queues you have to buy How many contracts of the queues you have to buy you have to beta weight it to the queues and that will give you the Exact deltas that you need on the queues to completely hedge this portfolio So if you take off the beta weighting you'll see you have only a raw delta of 594 But then just having the raw delta doesn't make any sense because all of these Stocks are going to move differently. So you want to reduce them all to a common base And you do that by beta weighting it Against the queues. Hope this was helpful. If you have any questions, please send us an email at info at option tiger dot com Thank you