Investing with options: hedging the Nasdaq 100 Investing with options: hedging the Nasdaq 100 Investing with options: hedging the Nasdaq 100

Investing with options: hedging the Nasdaq 100

Options 10 minutes to read
Koen Hoorelbeke

Options Strategist

Summary:  This article explores options hedging strategies, specifically long puts on QQQ (Nasdaq 100 etf) and a debit put spread on NDX (Nasdaq 100 index option), as practical solutions for investors to protect their portfolio gains against market volatility. It provides a comparative analysis of these strategies, considering various market scenarios, and aims to guide investors towards efficient capital protection.

Investing with options: hedging the Nasdaq 100

In today's financial climate, where the only constant is change, investors are acutely aware of the need for robust risk management strategies, particularly after achieving significant gains. In a hypothetical scenario reflective of the current market environment, an investor who has grown their portfolio from $100,000 to $110,000 is now confronted with the Nasdaq 100's impressive 10.88% rise in the last 22 days. With the aim of insuring these gains against market volatility, and with no more than 5% at risk, our focus turns to the practicality of options hedging. The low VIX and modest IV Rank of the NDX and QQQ present debit strategies as an attractive hedging route. This article explores two such strategies: long puts on QQQ and a debit put spread on NDX, offering a comparative analysis for investors seeking to fortify their portfolios in anticipation of potential market corrections or continuations of the rally.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.


Trade setups analysis

Long puts on the QQQ etf

Underlying Asset: Invesco QQQ Trust, Series 1 (QQQ)

  • Option Type: Long Put
  • Expiration Date: 15-Dec-2023
  • Strike Price: 405 USD
  • Quantity: 3 Contracts
  • Net Premium Paid: 4,428.00 USD
  • Delta: -0.8671

Analysis of the Long Puts

A long put option provides the right to sell the underlying asset at the strike price. It is a bearish strategy that benefits if the underlying asset price falls below the break-even point, which is the strike price minus the premium paid.

Hedging Strategy:

  • Maximum Risk: The total premium paid for the puts, which is $4,428.
  • Maximum Profit: Theoretically significant since the profit increases as QQQ falls below the strike price, with the maximum profit occurring if QQQ were to fall to $0 (not a realistic scenario).
  •  Break-Even Point: The strike price minus the net premium paid per share, which is calculated as the total premium divided by the number of contracts and the contract multiplier.

Hedging Calculation:

  • Determine the amount to protect: $110,000 * 95% = $104,500.
  • Capital at risk: $110,000 - $104,500 = $5,500.
  • Evaluate the cost-effectiveness: The premium paid for the puts ($4,428) is slightly less than the capital at risk ($5,500).
    Let's calculate the break-even point for these long puts and assess whether this setup could be a feasible hedging strategy for the portfolio.
  • The break-even point for the long put options on the QQQ is $390.24 per share. This means that for the puts to start being profitable, QQQ's price would need to fall below $390.24 by the expiration date.

Feasibility of the Hedging Strategy:

  • Maximum Risk: The total premium paid for the puts is $4,428, which is less than the capital at risk ($5,500) in the portfolio.
  • Break-Even Point: The break-even point is slightly lower than the current QQQ price of $390.34, which means the puts will start gaining intrinsic value if QQQ drops just slightly from its current level.
  • Hedging Effectiveness: The maximum profit is theoretically large if QQQ drops significantly, potentially providing substantial downside protection. However, this is capped by the reality that QQQ is unlikely to fall to $0, and profits are not linear due to the option's Delta.
  • Portfolio Protection: The premium is close to the capital at risk; thus, the puts could serve as a partial hedge. If QQQ were to decline below the break-even point, the increase in the value of the puts could offset some of the portfolio losses.
  • The break-even point is close to the current price, making it a sensitive hedge that could respond to even small decreases in the QQQ price.

    However, as with any options strategy, there are trade-offs. The time decay (Theta) will erode the value of these options as the expiration date approaches, especially if QQQ does not move below the break-even point. Additionally, the Delta indicates that the option price will move approximately $0.8671 for every $1 move in QQQ, which reflects high sensitivity to price changes in the underlying asset.

In conclusion, while the long puts on the QQQ do not offer a perfect hedge due to the premium paid, they could be a key component of a hedging strategy designed to protect the gains in your portfolio. This approach would be particularly effective if you anticipate a moderate to significant drop in the QQQ price before the expiration date.

In the next screenshot, we've provided a debit put spread on the Nasdaq 100 Index (NDX).

Here are the details:

Underlying Asset: Nasdaq 100 Index (NDX)

  • Strategy: Put Debit Spread
  • Buy Put Strike: 16100 USD
  • Sell Put Strike: 16000 USD
  • Expiration Date: 15-Dec-2023
  • Quantity: 1 Contract (for both buy and sell legs)
  • Net Premium Paid: 4,340.00 USD
  • Delta of Bought Put: -0.5029
  • Delta of Sold Put: -0.4367

Analysis of the Put Debit Spread:

A put debit spread is a bearish strategy and is structured by buying a higher-strike put and selling a lower-strike put with the same expiration date. The aim is to profit from a moderate drop in the underlying asset's price.

Hedging Strategy:

  • Maximum Risk: The net premium paid, which is $4,340.00.
  • Maximum Profit: The difference between the strike prices minus the net premium paid.
  • Break-Even Point: The bought put strike minus the net premium paid per share.

Hedging Calculation:

  • Determine the amount to protect: $110,000 * 95% = $104,500.
  • Capital at risk: $110,000 - $104,500 = $5,500.
  • Evaluate the cost-effectiveness: The premium paid for the spread is less than the capital at risk.
  • Profit/Loss Scenarios: If the NDX falls below the break-even point, the spread starts to profit, which can offset portfolio losses.
  • Let’s calculate the maximum profit for this spread and assess whether this setup is a feasible hedging strategy for the portfolio.
  • The put debit spread on the NDX has a maximum profit of $5,660 and a break-even point at an NDX price of $16,056.60.

Feasibility of the Hedging Strategy:

  • Maximum Risk: The maximum risk is the net premium paid, which is $4,340.
  • Maximum Profit: The maximum profit is $5,660, which is slightly more than the capital at risk ($5,500) of the portfolio.
  • Break-Even Point: The position becomes profitable if NDX falls below $16,056.60, which is relatively close to the current NDX price of $16,037.16.

For this put debit spread to be a viable hedging option, the maximum profit would ideally be at least equal to the capital at risk, which it is in this case. The strategy could provide coverage for a moderate drop in the NDX, with the potential to slightly exceed the capital at risk if the NDX falls significantly below the break-even point.

As a hedge, it offers a decent balance between risk (the premium paid) and potential reward (maximum profit). However, the actual effectiveness of the hedge depends on the movement of the NDX. If the index remains above the break-even point, the hedge would not be profitable, but the maximum loss would still be capped at the premium paid.

The deltas of the options indicate the sensitivity of the option prices to changes in the underlying NDX. Since the absolute values of the deltas are close to each other, this spread is less sensitive to small changes in the NDX price compared to a single long put option, but it provides a strong potential for profit if a significant drop occurs.

In summary, this NDX put debit spread seems to be a more suitable hedging strategy compared to the single long put options previously discussed. It provides a reasonable balance between cost and the level of protection for the portfolio, assuming the NDX moves below the break-even point.

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Conclusion and comparative analysis

Upon analyzing the two hedging strategies, we can draw objective conclusions based on the capital at risk and the simulations performed. The following table incorporates these crucial financial implications:


Premium PaidBreak-Even PointMaximum RiskMaximum ProfitCapital at RiskCapital Protected
 Long Puts on QQQ$4,428$390.24$4,428Theoretical max$4,428$104,500
 Debit Put Spread NDX$4,340$16,056.60$4,340$5,660$4,340$104,500

Capital at Risk Calculations:

For a portfolio valued at $110,000, with the aim to protect 95% of its value, the capital at risk is calculated as the difference between the current portfolio value and 95% of that value, which is $5,500. Both strategies use a premium less than this amount, indicating an efficient use of capital for protection.


The QQQ long puts provide a direct hedge with a one-to-one correspondence to declines in the QQQ price, highly responsive due to the high delta of the options. The downside is fully covered, with the maximum risk equating to the premium paid.

The NDX debit put spread offers a defined risk and reward, with the maximum loss limited to the premium and the maximum gain capped by the spread between the strike prices. This strategy benefits from a moderate decline in the NDX index and provides a structured payout.

Both strategies effectively ensure that the portfolio is not exposed to a loss greater than the premium paid, which is within the acceptable risk of 5% of the portfolio's value.

The choice between the two would depend on the investor’s outlook on the market and volatility. The long puts on QQQ are more suitable if a significant downturn is expected, as they could potentially provide unlimited upside from a decline in the QQQ price. On the other hand, the NDX debit put spread is more conservative, offering protection against a moderate drop with a limited maximum gain, which could be preferable if a drastic market fall is not anticipated.

Investors should also consider other factors, such as implied volatility, the time decay of options (Theta), and the potential for recovery in the underlying assets when choosing the right hedging strategy.

Final words:

In conclusion, the trading setups outlined in this article are designed to provide you with a structured approach to safeguard your capital. The goal is to offer a framework that encourages thoughtful strategies for efficient capital protection. It is our hope that this information will serve as a valuable tool in your toolkit, aiding in the effectiveness of your investment activities.

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