A Super Cheap Way to Protect Yourself from Risk Overseas

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A Super Cheap Way to Protect Yourself from Risk Overseas


One of the questions I get a lot when I speak at events like the MoneyShow and TradersExpo is about the benefits of looking at large options trades.  Large trades using options, typically called block trades, are often executed by big firms with a lot of capital and resources.

As such, block trades can be very valuable indicators of what the smart money is doing with their time and money.  Block trades can potentially show you how funds are using covered calls, what stocks have breakout potential, or even what pension funds are using to protect themselves.

It’s true, block trades can be professional hedges or they can be speculative bets.  Sometimes, it’s not all that obvious what you’re looking at.  But, there are often clues.  For instance, hedges tend to be long puts or long put spreads (buying a put vertical spread) in index ETFs.

That’s not to say that there aren’t large downside bets in index ETFs which are speculative.  However, those downside bets tend to be a bit more creative than outright put or put spread purchases.  Index puts can be expensive, so speculative options buyers will be looking to keep costs low.  On the other hand, hedges are meant strictly for protection, and many firms or funds are willing to pay up for protection (or they have no choice).

Of course, if hedgers can find a way to protect themselves cheaply and effectively, they’ll definitely go that route.  Take for example a big trade from last week in SPDR Euro Stoxx 50 ETF (NYSE: FEZ) options.


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