With increasing volatility in the market the average investor is starting to learn what the professional investor has known for years. It is important to be hedged just in case you are wrong about the direction of the stock that you’ve just purchased.

Buy Puts. A simple strategy to hedge your portfolio is to buy some option puts. A put is a contract that makes money when the stock or index that it represents falls in price. For example if you have a handful of stocks that are traded on the DOW or S&P you can purchase puts on the DIA or the SPY, which are the exchange traded funds (ETF) that represent these indexes. That way if the value of your stocks fall then value of the puts will go up substantially reducing your losses. The goal here is to make more money on one side than the other. So you want the value of your stocks to increase more than the decrease in the value of your puts.

Sell Calls. Perhaps a better way to hedge your portfolio is for you to sell calls either on the stock This is called “Covered Call Writing”. This is when you own a stock and sell calls against that stock, thus generating a small amount of income. For example you own Intel stock (INTC) and you purchased 100 shares at $20.00 a share. Costing you $2,000. You can sell a call option against it which will bring in $100, which will generate 5% of the cost of your stock. That way if the stock falls you won’t start losing money until after it’s gone down by more than $1.00. Even better if the stock goes up you will pocket the additional $100 from selling the call. This is the least risky way to hedge your portfolio

Sell calls on an index. Another way to hedge is by selling naked calls on an index such as the DIA or S&P. But while this can be a winner a high percentage of the times. It can also be very risky in the event that there is a sharp move upwards so understand all of the possibilities before you use this strategy.