The market continues to be dismantled before our very eyes. As I type, the Nasdaq is down another 2.3% premarket as the so-called FAANG gang get jettisoned from portfolios across the land. Momentum has become anathema.

As the bull market gains unravel the importance of preserving gains and sanity become paramount. All of a sudden the wisdom of portfolio protection has come to the fore. There is no time like the present to dive into the Bear Market Survival Guide to equip yourself with the best tactics for weathering the market turmoil.

One of the critical pieces of the guide involves the proper use of put options as a portfolio hedge. To ensure traders apply and manage them properly, we review the best tactics for dealing with a rising, stagnant, and falling market. Ironically it’s when prices crash and your put option balloons in value that the management is trickiest.

The reason is simple: you have a handful of ways you can go about harvesting gains. Cindy asked just such a question in the clubhouse that we’ll address today.

“I have an SPY put on both my Margin account and my IRA account (one 20 SEP 19 245 put on each). They have worked well in keeping losses to a minimum in our current (uncertain) market – thanks BMSG. However, I don’t want to be in the position of keeping a hedge on too long – I have had significant drawdowns in the past from doing that. My question is, when do I remove the SPY puts as protection for my portfolio? I’m thinking it is when SPY breaks major resistance, i.e. 293, but I wanted to check it with you first as my loss from the puts at that point would be pretty significant.”

First things first. Congrats for acquiring protection before the crash. Your foresight and preparation are being rewarded. Anyone can buy puts, but only a graduate of the Bear Market Survival Guide and one who has adequately internalized its lessons can manage the market volatility with finesse.

Second, I suggest reviewing Module 5 of the video series which is titled, “I Bought Portfolio Protection, Now What?” I created it to deal with the very situation that you find yourself in. It will provide more comprehensive answers than I can in a blog post. Also, in the e-book that accompanies the premium system, there is an article on page 33 that goes step-by-step through three different ways you can manage your profitable put option. Here is an excerpt:

“Deciding how to manage the trade with a large down move in the SPY is perhaps the trickiest of all the potential outcomes. The market will undoubtedly be in a sharp downtrend, ugly as sin. Fear of further selling will make it extremely tempting to hold onto the puts just in case the 15% drop morphs into a 25% one, or worse. And yet, if you never ring the register or adjust your position after large corrections you’ll see the paper profits in the puts dissipate once the market recovery takes root. I’m an advocate of doing something at this point. Which action you take depends on which tradeoffs you find most attractive.”

Here are three ideas.

First, if you think the market correction is over and you’re willing to face the future without protection, then sell to close the puts. You probably won’t ever be able to sell them at the exact low so don’t beat yourself up if you exit a bit early. Personally, I’d prefer to sell them into weakness (when the market gets really oversold and I think we’re close to capitulation) than wait for a break above resistance. If you wait for SPY to rally above the ceiling at $282 or $293 you will probably give back all your profits. Selling into weakness also means you will be unloading your puts when implied volatility is sky high and the premiums are pumped up.

Second, if you’re unwilling to completely part with your protection in case the market’s 10% or 15% drop ends up morphing into a hold-me-mommy bear market of -30%, then you could roll down your put. For example, you could sell your Sep $245 put and capture the gain. Then with part of the profits you buy a cheaper, further OTM put such as the Sep $220 put. That way if the market continues to crash you have some protection, but if it stabilizes or rebounds then you won’t lose as much in the new, cheaper put.

Third, you could roll to a vertical (i.e., bear put) by selling a lower strike put against your Sep $245 put. The money received from the short put will offset the overall cost, and thus risk of your total position. For example, let’s say you purchased the Sep $245 put for $8. After a market drop, it rises in value to $12 giving you a $4 unrealized gain. Rather than exiting you could sell a Sep $220 put against it for $4 morphing the trade into a Sep $245/$220 bear put spread for a total debit of $4. If the market recovers, the money you give back from your long $245 put will be partially offset by what you’re now making in your short $220 put.

Also, which put you decide to sell against the long Sep $245 put is personal preference. Use a risk graph to strike the right balance between additional protection provided and how much credit you’re receiving.