{"id":64972,"date":"2025-08-20T02:00:58","date_gmt":"2025-08-20T07:00:58","guid":{"rendered":"https:\/\/www.tradestation.com\/insights\/?p=64972"},"modified":"2025-08-20T07:12:58","modified_gmt":"2025-08-20T12:12:58","slug":"options-hedge-volatility-vega","status":"publish","type":"post","link":"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/","title":{"rendered":"Powell Speaks Soon: Here Are 3 Ways to Hedge Gains"},"content":{"rendered":"<p>Federal Reserve news this week could trigger volatility. This article will consider three potential hedging strategies before the events.<\/p>\n<p>First, here are the potential catalysts:<\/p>\n<ul>\n<li>Today at 2 p.m. ET: The central bank will release minutes from its last meeting. While minutes don&#8217;t usually move stocks, they could still be closely watched.<\/li>\n<li>Friday at 10 a.m. ET: Chairman Jerome Powell speaks at Jackson Hole, Wyoming. His address could have a big impact on sentiment by influencing interest-rate expectations.<\/li>\n<\/ul>\n<p>The basic question is how aggressively the Fed will cut interest rates over the remainder of 2025. Futures pricing tracked by CME&#8217;s FedWatch tool shows the market expecting a 25 basis-point cut on September 17 and at least one more in October or December.<\/p>\n<p>However, last week&#8217;s inflation readings were higher than policymakers&#8217; target. Initial jobless claims also show a relatively tight labor market. Those points could potentially argue against aggressive rate cuts.<\/p>\n<p>Traders worried about volatility can use various option strategies. Here are three potential approaches they may consider:<\/p>\n<ul>\n<li>Vertical put spread: Target a move down to a certain level.<\/li>\n<li>Collar: Protect gains on stock positions.<\/li>\n<li>High-Vega puts: Isolate volatility from movement.<\/li>\n<\/ul>\n<div id=\"attachment_64980\" style=\"width: 1034px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-64980\" class=\"size-large wp-image-64980\" src=\"https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/MSFT_options_20250819-1024x550.jpg\" alt=\"\" width=\"1024\" height=\"550\" srcset=\"https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/MSFT_options_20250819-1024x550.jpg 1024w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/MSFT_options_20250819-300x161.jpg 300w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/MSFT_options_20250819-768x413.jpg 768w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/MSFT_options_20250819-1536x826.jpg 1536w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/MSFT_options_20250819-1080x581.jpg 1080w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/MSFT_options_20250819.jpg 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><p id=\"caption-attachment-64980\" class=\"wp-caption-text\"><em>OptionStation Pro, highlighting Microsoft (MSFT) contracts cited in this article.<\/em><\/p><\/div>\n<h2>Vertical Put Spread<\/h2>\n<p><a href=\"https:\/\/www.tradestation.com\/insights\/2024\/05\/12\/the-basics-of-options\/\">Puts<\/a> often gain value when stocks fall because they fix the price where a security can be sold. Traders can also combine long and short legs in a <a href=\"https:\/\/www.tradestation.com\/insights\/2024\/05\/08\/bullish-and-bearish-key-points-about-vertical-option-spreads\/\">vertical spread<\/a> to leverage a move between two prices.<\/p>\n<p>For example, Microsoft (MSFT) has drifted lower after hitting a record high above $550 late last month. It closed yesterday at $509.77. Investors worried about more downside could:<\/p>\n<ul>\n<li>Buy 1 September 490 put for $4.65.<\/li>\n<li>Sell 1 September 480 put for $2.63.<\/li>\n<\/ul>\n<p>Such a trade would cost about $2. It would expand to $10 if MSFT closes at $480 or lower on expiration. That&#8217;s a potential gain of roughly 400 percent from the stock dropping 6 percent. The position will expire worthless if MSFT remains above $490.<\/p>\n<p>Vertical spreads have another drawback: Maximum gains occur at the the lower strike, so moves below $480 won&#8217;t make any additional profit.<\/p>\n<h2>Collar Trade<\/h2>\n<p>Say an investor purchased 100 shares of MSFT before its recent rally and is now sitting on big gains. He or she could hedge with a &#8220;collar&#8221; strategy:<\/p>\n<ul>\n<li>Sell 1 September 530 call for $4.05.<\/li>\n<li>Buy 1 September 490 put for $4.65.<\/li>\n<\/ul>\n<p>Such a trade would cost $0.60 per share, or $60 in total. Because the investor owns stock, they can sell calls against the equity to collect a credit. That cash can then be used to buy puts with the potential to gain value if prices fall. The collar will expire worthless if MSFT remains between $490 and $530.<\/p>\n<h2>Collar vs Spread<\/h2>\n<p>Investors might recognize some key differences between vertical spreads and collars.<\/p>\n<p>Cost:<\/p>\n<ul>\n<li>Spreads cost more because the trader sells contracts further from the money.<\/li>\n<li>Collars cost less because the contracts bought and sold are roughly the same distance from the current price.<\/li>\n<\/ul>\n<p>Assignment risk:<\/p>\n<ul>\n<li>Spreads have assignment risk if the underlier (in this case, MSFT) is between the strike prices. The trader may be assigned a short position on MSFT. If they own shares, it could result in their stock being sold at the higher strike.<\/li>\n<li>Collars have assignment risk to the upside and downside. If MSFT rallies above $535, they could be forced to deliver shares for that price. If the stock falls under $485 and the investor holds the puts through expiration, their stock will be sold at the strike price. He or she can avoid this by selling the puts before expiration.<\/li>\n<\/ul>\n<p>Profit to the Downside:<\/p>\n<ul>\n<li>Vertical spreads have limited profit potential to the downside, only profiting down to the lower strike.<\/li>\n<li>Collars have more profit potential to the downside because the long put increases as the stock falls. It effectively provides protection all the way down to zero.<\/li>\n<\/ul>\n<p>Upside Exposure:<\/p>\n<ul>\n<li>Vertical spreads let investors remain exposed to further upside. For example, if MSFT jumps to $600 or $700, they will still profit from the shares they own.<\/li>\n<li>Collars limit upside because they involve short calls. In this case, the most they can receive for the stock is $535.<\/li>\n<\/ul>\n<p>In other words, collars are &#8220;cheaper&#8221; because they surrender future potential profits to protect against potential downside. Spreads cost more, but &#8220;keep you invested.&#8221;<\/p>\n<div id=\"attachment_64981\" style=\"width: 1034px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-64981\" class=\"size-large wp-image-64981\" src=\"https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/QQQ_20250819-1024x490.jpg\" alt=\"\" width=\"1024\" height=\"490\" srcset=\"https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/QQQ_20250819-1024x490.jpg 1024w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/QQQ_20250819-300x143.jpg 300w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/QQQ_20250819-768x367.jpg 768w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/QQQ_20250819-1536x734.jpg 1536w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/QQQ_20250819-1080x516.jpg 1080w, https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/QQQ_20250819.jpg 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><p id=\"caption-attachment-64981\" class=\"wp-caption-text\"><em>Invesco QQQ (QQQ), daily chart, showing implied volatility.<\/em><\/p><\/div>\n<h2>High Vega Puts<\/h2>\n<p>Another alternative is to buy puts on an exchange-traded fund (ETF) like the Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100.<\/p>\n<p>Traders can potentially buy vertical put spreads on QQQ if they expect the broader market to decline.<\/p>\n<p>They might also consider long-dated puts that are far out of the money. These contracts tend to have higher Vega, which makes them sensitive to potential spikes in volatility. (See <a href=\"https:\/\/www.tradestation.com\/insights\/2024\/05\/12\/memory-tricks-options-greeks-delta-gamma-theta-vega\/\">this article<\/a> for more on option Greeks like Vega and Delta.)<\/p>\n<p>For example, QQQ&#8217;s 18-September 2026 250 puts have 0.23 Vega and cost about $1.65. They will gain about $0.23 for every 1 percentage point that implied volatility (IV) increases on QQQ.<\/p>\n<p>This strategy essentially isolates volatility for investors to trade. It can potentially make sense when volatility is near the bottom of its long-term range, as it now is. (See the chart.) For example, if IV climbs from roughly 20 to 30 percent, the puts cited above could gain about $2.30 &#8212; more than doubling.<\/p>\n<p>While other strategies can make more money from such a drop, long-dated puts have other potential benefits:<\/p>\n<ul>\n<li>With more than a year to expiration, they have little time decay for the next few months. As a result, investors can hold them as a general hedge over several weeks. That can make them potentially useful amid events like Fed speeches and Labor Day, which often sees higher volatility.<\/li>\n<li>They only have 0.02 delta, which reduces their losses from a potential rally in QQQ. Shorter-dated put strategies can lose significant value from prices moving higher<\/li>\n<\/ul>\n<p data-start=\"75\" data-end=\"570\">In conclusion, investors may think they don&#8217;t need to hedge when volatility is low. But such moments can also make protective strategies more affordable. Trades like vertical spreads, collars, and long-dated puts each have unique costs, benefits and risks. Investors should consider these trade-offs to understand whether a given strategy works and aligns with their goals and risk tolerance.<\/p>\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n<table border=\"1\">\n<caption><strong>Standardized Performances for ETFs mentioned above<\/strong><\/caption>\n<tbody>\n<tr>\n<td><strong>ETF<\/strong><\/td>\n<td><strong>1 Year<\/strong><\/td>\n<td><strong>5 Years<\/strong><\/td>\n<td><strong>10 Years<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Invesco QQQ (QQQ)<\/td>\n<td>+19.94%<\/td>\n<td>+112.75%<\/td>\n<td>+405.69%<\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><em>As of July 31, 2025. Based on TradeStation data<\/em><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p data-start=\"75\" data-end=\"570\"><em>Exchange Traded Funds (\u201cETFs\u201d) are subject to management fees and other expenses. Before making investment decisions, investors should carefully read information found in the prospectus or summary prospectus, if available, including investment objectives, risks, charges, and expenses.\u00a0<a href=\"https:\/\/www.tradestation.com\/insights\/etf-disclosures\/\">Click here<\/a> to find the prospectus.<\/em><\/p>\n<p data-start=\"75\" data-end=\"570\"><em>Performance data shown reflects past performance and is no guarantee of future performance. The information provided is not meant to predict or project the performance of a specific investment or investment strategy and current performance may be lower or higher than the performance data shown. Accordingly, this information should not be relied upon when making an investment decision.<\/em><\/p>\n<p data-start=\"75\" data-end=\"570\"><em>Options trading is not suitable for all investors. Your TradeStation Securities\u2019 account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See\u00a0<a href=\"https:\/\/www.theocc.com\/Company-Information\/Documents-and-Archives\/Options-Disclosure-Document\">www.TradeStation.com\/DisclosureOptions<\/a>. Visit\u00a0<a href=\"http:\/\/www.tradestation.com\/Pricing\">www.TradeStation.com\/Pricing<\/a> for full details on the costs and fees associated with options.<\/em><\/p>\n<p data-start=\"75\" data-end=\"570\"><em>Margin trading involves risks, and it is important that you fully understand those risks before trading on margin. The Margin Disclosure Statement outlines many of those risks, including that you can lose more funds than you deposit in your margin account; your brokerage firm can force the sale of securities in your account; your brokerage firm can sell your securities without contacting you; and you are not entitled to an extension of time on a margin call. Review the\u00a0Margin Disclosure Statement at\u00a0<a href=\"https:\/\/uploads.tradestation.com\/uploads\/margin-disclosure-statement.pdf\">www.TradeStation.com\/DisclosureMargin<\/a><\/em>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Federal Reserve news this week could trigger volatility. This article will consider three potential hedging strategies before the events.<\/p>\n","protected":false},"author":39,"featured_media":64978,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false,"footnotes":""},"categories":[24,14,30],"tags":[],"class_list":["post-64972","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-indexes-and-etfs","category-options","category-technology","et-has-post-format-content","et_post_format-et-post-format-standard"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Powell Speaks Soon: Here Are 3 Ways to Hedge Gains | Market Insights<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Powell Speaks Soon: Here Are 3 Ways to Hedge Gains | Market Insights\" \/>\n<meta property=\"og:description\" content=\"Federal Reserve news this week could trigger volatility. This article will consider three potential hedging strategies before the events.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/\" \/>\n<meta property=\"og:site_name\" content=\"Market Insights\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/TradeStation\/\" \/>\n<meta property=\"article:published_time\" content=\"2025-08-20T07:00:58+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-08-20T12:12:58+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/volatility-ahead-TS-BBT-1396341818.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1920\" \/>\n\t<meta property=\"og:image:height\" content=\"1080\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"David Russell\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@TradeStation\" \/>\n<meta name=\"twitter:site\" content=\"@TradeStation\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"David Russell\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"7 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/\",\"url\":\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/\",\"name\":\"Powell Speaks Soon: Here Are 3 Ways to Hedge Gains | Market Insights\",\"isPartOf\":{\"@id\":\"https:\/\/www.tradestation.com\/insights\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/volatility-ahead-TS-BBT-1396341818.jpg\",\"datePublished\":\"2025-08-20T07:00:58+00:00\",\"dateModified\":\"2025-08-20T12:12:58+00:00\",\"author\":{\"@id\":\"https:\/\/www.tradestation.com\/insights\/#\/schema\/person\/d2279ba57f90e3b47887f2503ce142d4\"},\"breadcrumb\":{\"@id\":\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/#primaryimage\",\"url\":\"https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/volatility-ahead-TS-BBT-1396341818.jpg\",\"contentUrl\":\"https:\/\/cdn.tradestation.com\/uploads\/sites\/2\/volatility-ahead-TS-BBT-1396341818.jpg\",\"width\":1920,\"height\":1080},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.tradestation.com\/insights\/2025\/08\/20\/options-hedge-volatility-vega\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.tradestation.com\/insights\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Powell Speaks Soon: Here Are 3 Ways to Hedge Gains\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.tradestation.com\/insights\/#website\",\"url\":\"https:\/\/www.tradestation.com\/insights\/\",\"name\":\"Market Insights\",\"description\":\"Fresh market commentary and actionable trade ideas.\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.tradestation.com\/insights\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.tradestation.com\/insights\/#\/schema\/person\/d2279ba57f90e3b47887f2503ce142d4\",\"name\":\"David Russell\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.tradestation.com\/insights\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/443bdca82f0006231c5179581e4310ed?s=96&d=mm&r=pg\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/443bdca82f0006231c5179581e4310ed?s=96&d=mm&r=pg\",\"caption\":\"David Russell\"},\"description\":\"David Russell is Global Head of Market Strategy at TradeStation. Drawing on more than two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories \u2013 especially those overlooked by other commentators. 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Drawing on more than two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories \u2013 especially those overlooked by other commentators. 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