The Hedging Bots Explained

Hedging bots in the Options Auto Trader strategy database help protect against market crashes, pullbacks, and volatility spikes. By using these bots strategically, traders can offset losses and create a smoother profit and loss curve.

Types of Hedging Bots

There are three main types of hedging bots available:

1. Correction Hedge

• Type: 60 DTE (Days to Expiration) long put

• Purpose: Protects against 5-10% market corrections

• Protection Level: ~$8,000 per hedge (varies)

• Cost: ~$1,000 per hedge

• Ideal Ratio: 1 hedge for every $50,000 of trading risk

2. Cheap 14-Day Hedge

• Type: 14 DTE long put

• Purpose: Protects against 5-10% market corrections

• Protection Level: ~$3,000 per hedge

• Cost: ~$300 per hedge

• Ideal Ratio: 1 hedge for every $10,000 of risk

3. Black Swan Hedge

• Type: 60 DTE credit spread with long puts

• Purpose: Protects against extreme crashes (10-20%+ in a short period)

• Protection Level: ~$30,000 per hedge (varies)

• Cost: ~$2,000 per hedge

• Ideal Ratio: 1 hedge for every $100,000 of trading risk

• Note: The Black Swan Hedge is expensive and rarely pays off. It should only be used when extreme market crashes are likely.

How to Calculate Risk:

1. Identify the maximum loss for each open trade if the stop loss is hit.

2. Add up the max loss from all open trades to determine total trading risk.

3. If the total risk is around $50,000, add one correction hedge.

When to Use Hedging Bots

Placing hedges at the right time is crucial to avoid unnecessary costs. Use Bollinger Bands to determine ideal hedge placement.

Setting Up Bollinger Bands:

1. Open your broker’s charting platform (e.g., TradingView).

2. Click on Indicators and search for Bollinger Bands.

3. Adjust the length setting from 20 to 200.

Interpreting Bollinger Bands for Hedging

• Normal Market Conditions (Between Green and Blue Lines):

  • No hedge needed; low crash risk.

• Moderate Risk Zone (Above Blue Line, Below Red Line):

  • Consider placing Correction Hedges or Cheap 14-Day Hedges.

• High Risk Zone (Above Red Line):

  • Place Black Swan Hedges.

• Extreme Market Conditions (Breaking Above Red Line for an Extended Time):

  • Strongly consider Black Swan Hedge for maximum protection.

Alternative to Hedging: Exiting Trades

Sometimes, the best protection is to exit trades entirely. The Early Crash Warning System automatically exits trades if the market breaks above the red line and then reverses.

Summary

• Use Correction Hedge or Cheap 14-Day Hedge for 5-10% pullbacks.

• Use Black Swan Hedge for extreme, unpredictable crashes.

• Apply hedges only when the market is near or above the red zone on Bollinger Bands.

• Avoid wasting money by hedging in low-risk zones.

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