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What Buying Protection Actually Costs You Every Year

NowPress play to follow along0:00 / 12:16
Chapters6 segments · tap to seek
ticker lesson

Breakdown

0:00lesson

Buying protection costs traders

  • Testing if protection worth cost
  • Puts as car insurance for stock
  • Testing on SPY over 6 years
  • 1400 trades analyzed
2:11lesson

Put pay off analysis

  • Put can pay off in certain scenarios
  • T1 = made money, red = lost money
  • Only 7% of puts made money
  • Timing is critical for puts
4:30lesson

Cost of buying puts daily

  • Cost 4.4% of stock value annually
  • 21DT cost for managing puts
  • Cost is small but recurring
  • Hedging pays for 19% of trades
6:31lesson

Married put protection

  • Married put saves 13.6% when stock falls 20%
  • Cost 0.85% when stock flat
  • Married puts save 61% of trades
  • Unmanaged puts save 40-45%
8:46lesson

Comparison of buy and hold vs. married puts

  • Buy and hold = 38,000 profit
  • Married puts = 25,000 profit
  • Unmanaged puts = 66% loss
  • Cost of protection is significant
10:57lesson

Takeaways on hedging

  • Hedging only works if timing is right
  • Paying for protection costs more than helps
  • Success rate improves from 7% to 19%
  • Pay for protection only for risk you cannot carry

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