Please excuse typos. I had to type this fast so we can put on our trade.
With Nvidia trading near its all-time highs of around $140 a share, I've decided it's time to starting thinking about hedging our Nvidia $90 call-options in the Lannister Portfolio. Notice that hedging leaps is a lot tricky i...
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Hi Sam. My current portfolio is similar to one of your common stock portfolios in size and risk. I would like to take a position that would protect my NVDA investment. Would the recent puts purchased in the Lannister portfolio serve this purpose as well as the puts purchased a wile back in the Tyrell portfolio?
If Nvda did take a dive to $100 would you then consider selling the puts to reinvest that money along with holding the Nvda common stock for the potential recovery?
So yesterday I published an analysis behind the hedges we put on. It’s impossible to really know how much and what puts without doing a similar analysis but on your individual portfolio.
When we put on a hedge, we answer this question. What happens if Nvidia falls to $100, $90, $80, $70, $60, $50 etc at 3-months, 6-months, 9-months or 12-months from today.
You can estimate what the options will be valued at by looking at corresponding expirations at each of those periods and making certain deductions based on various distances from the strike prices.
For example, consider our long position. We own the Nvidia December 2026 $90 call-options at $43.80 per contract (worth $68.40 today). So how do we determine what that contract will be worth 6-months from now at various price points?
The first we have to do to produce that estimate is simply look at options that expire 6-months earlier than December 2026. If we want to estimate what the December 2026 options will be valued at 6-months into the future from today, then we need to look at options that expire 6-months earlier December 2026. That would be the June 2026 expiration. Okay. So now that we know which expiration to look at, let’s consider various price points.
What will our options be worth if Nvidia were to drop to $100 a share? To figure that out, we need to do TWO things. And these are intuitive things. First, we need to look at the value of an option that is exactly $10 in the money. Why $10 in the money? Simple. At $100, OUR $90 call options will be $10 in the money.
So what we really want to know is what is the value of a Nvidia option that is $10 in the money 6-months into the future. With Nvidia trading at $138, we can look at the Nviida June 2026 $128 calls to give us a rough estimate of what OUR $90 call options would be worth 6-months from now on a drop to $100 a share. A look at the June 2026 $128 calls indicates a price of $44.15. That’s what our $90 December 2026 call options would be worth on a drop to $100 a share in 6-months from now.
To hedge, we have to run the same exact analysis for the put options we decide to buy. The reason we picked the $100 puts specifically is three reasons. First, we bought near $100 share. Second, that is where major support lies n the stock. Third, our hedge is intended to insure against the risk of a major collapse, not a regular correction. We don’t need to hedge a short-term drop to $100 and ensuing rebound up to $140 right? We just need to hedge out those existential risks to the portfolio.
Anyway, your question gives me an idea. I think I’m going to add a chapter to Risk Management outlining this analysis — how to pick a hedge. Hedging is very portfolio specific. You have to strike a balance between cost and insurance.
For example, as illustrated yesterday, we only needed to buy 2 contracts to get our hedge. Anything more than that would be over-insuring our position and we’d be losing a lot of profits doing so. You can only figure this out by running the 4 tables we put together in that article yesterday.
Hey Sam, are those calculations more precise than if you just put those values into an options calculator?