{"id":28550,"date":"2026-09-24T07:30:00","date_gmt":"2026-09-24T11:30:00","guid":{"rendered":"https:\/\/jeffclarktrader.com\/market-minute\/?p=28550"},"modified":"2026-09-23T19:32:53","modified_gmt":"2026-09-23T23:32:53","slug":"how-to-hedge-downside-risk-with-a-favorable-reward-risk-payoff","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/how-to-hedge-downside-risk-with-a-favorable-reward-risk-payoff\/","title":{"rendered":"How to Hedge Downside Risk With a Favorable Reward\/Risk Payoff"},"content":{"rendered":"\n
\n

Managing Editor\u2019s Note:<\/strong> Today, we\u2019re hearing from our contributing editor Mike Burnick in his weekly feature.<\/p>\n

Mike has over 30 years in the investment and financial services industry \u2013 from operating as a stockbroker, trader, and research analyst, to running a mutual fund as a registered investment advisor and portfolio manager, to being Research Director for the Sovereign Society, specializing in global ETF and options investing.<\/p>\n

 And he\u2019s been senior analyst at TradeSmith for three years, running Constant Cash Flow, Infinite Income Loop, and Inside TradeSmith.<\/p>\n

Here\u2019s Mike\u2026<\/p>\n<\/div>\n\n\n\n

How to Hedge Downside Risk With a Favorable Reward\/Risk Payoff<\/h2>\n\n\n\n

BY MIKE BURNICK, CONTRIBUTING EDITOR, MARKET MINUTE <\/em><\/strong><\/p>\n\n\n\n

Previously I pointed out that September-October seasonality is not kind to the stock market. And during mid-term election years, the potential downside is magnified.<\/p>\n\n\n\n

But with the last week of September fast approaching, so far stocks have held up. That\u2019s especially true considering sky-high oil prices and rising interest rates.<\/p>\n\n\n\n

In fact, markets seem downright complacent at the moment, as our Trade360 Options Market Indicators clearly show.<\/a><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Options360 subscribers can quickly view these key option market indicators by logging into TradeSmith Finance, clicking on Options360<\/em><\/strong>, then Dashboard<\/em><\/strong>.<\/p>\n\n\n\n

Our Put\/Call Ratio<\/strong> (PCR) Sentiment<\/strong> indicator (below left<\/em>) reflects this broad complacency.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Both the option Premium PCR<\/strong> and the option Volume PCR<\/strong> are at unusually low levels.<\/p>\n\n\n\n

This is often a contrarian-bearish setup pointing to a potential market drop.<\/p>\n\n\n\n

And at the same time, the Implied Volatility Rank<\/strong> (above right<\/em>) for the S&P 500 ETF (SPY)<\/strong> is at very low levels.<\/p>\n\n\n\n

This means options are cheap right now at the same time that complacency reigns supreme.<\/p>\n\n\n\n

And that\u2019s a setup for a rude wake-up call for markets.<\/p>\n\n\n\n

One way to take advantage of this setup is buying cheap SPY put options to hedge against any market move to the downside into October.<\/p>\n\n\n\n

Options360 members can easily put this trade idea into practice by using our Calculator<\/strong> to run a Scenario<\/strong> evaluation on SPY put options.<\/p>\n\n\n\n

Simply click on Calculator,<\/em> then on Scenario<\/em>. Then enter the ticker symbol for your underlying security and the option type (call or put<\/em>), in this case SPY puts.<\/p>\n\n\n\n

Next, make a few simple choices for your option expiration date and strike price.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

For instance, let\u2019s choose an SPY put expiring Oct 16 with a $750 strike price.<\/p>\n\n\n\n

You can modify any of these scenario parameters as you see fit, by choosing a different expiration date, option strike price, or change the expected percentage move and end date.<\/p>\n\n\n\n

Once you\u2019ve selected all your scenario parameters, just click Evaluate Trade.<\/p>\n\n\n\n

In this trade scenario let\u2019s see what happens if SPY moves up or down by 3%<\/strong> between now and October 1<\/strong>.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

As shown, your breakeven price on this trade would be $746.57<\/strong>, not far below the strike price.<\/p>\n\n\n\n

At breakeven you\u2019ve covered the $342<\/strong> cost of the put option and if SPY moves below this level, you\u2019re earning profits on the trade.<\/p>\n\n\n\n

The Profit\/Loss Curve<\/strong> shows the possible scenarios for a +\/- 3%<\/strong> move in SPY.<\/p>\n\n\n\n

If SPY moves up 3%,<\/em> your loss on the option trade is -$323.21<\/strong>.<\/p>\n\n\n\n

But if SPY moves down 3%<\/em> into October, your profit is +$628.93<\/strong>.<\/p>\n\n\n\n

So, your potential profit is nearly 2x your possible loss. That\u2019s the kind of asymmetric profit\/loss potential I look for in a hedge trade.<\/p>\n\n\n\n

Bottom line<\/em><\/strong>: The stock market is vulnerable to a seasonal slump, option market indicators show complacency (a bearish setup<\/em>) and put options are cheap. That\u2019s a good setup to consider hedging your downside risk with favorable reward\/risk payoff potential.<\/p>\n\n\n\n

Good investing,<\/p>\n\n\n\n

\"Signature\"<\/figure>\n\n\n\n

<\/p>\n\n\n\n

Mike Burnick
Contributing Editor, Market Minute<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Markets seem downright complacent at the moment.<\/p>\n","protected":false},"author":2762,"featured_media":0,"comment_status":"closed","ping_status":"0","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ep_exclude_from_search":false,"service":"","footnotes":""},"categories":[1],"tags":[],"publication":[10],"person":[155],"newsletter-type":[],"ticker":[],"class_list":["post-28550","post","type-post","status-publish","format-standard","hentry","category-market-minute","publication-market-minute","person-mike-burnick"],"acf":[],"ai_tts_audio_outdated":false,"ai_tts_content_changed_at":"","ai_tts_content_changed_during_generation":false,"ai_tts_legacy_post":false,"_links":{"self":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/28550","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/users\/2762"}],"replies":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/comments?post=28550"}],"version-history":[{"count":2,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/28550\/revisions"}],"predecessor-version":[{"id":28559,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/28550\/revisions\/28559"}],"wp:attachment":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/media?parent=28550"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/categories?post=28550"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/tags?post=28550"},{"taxonomy":"publication","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/publication?post=28550"},{"taxonomy":"person","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/person?post=28550"},{"taxonomy":"newsletter-type","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/newsletter-type?post=28550"},{"taxonomy":"ticker","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/ticker?post=28550"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}