Monday’s market action was a perfect example of why traders need a hedge. We opened with a massive gap down, catching a lot of people off guard.
But those who had protection in place — like the VIX hedge I discussed in Monday’s newsletter — weren’t sweating the drop too much. In fact, depending on how they structured their hedge, they were either protected or even profited from the move.
Let’s be clear…
Sell-offs like this are part of the game. Markets don’t just move in a straight line up. They pull back, consolidate and reset before making their next move. But if you’re trading without a safety net, a sudden drop like we saw can wipe out weeks — or months — of gains.
That’s where hedging comes in.
One of the simplest ways to hedge against a sharp downturn is using the VIX. The VIX, often called the market’s fear gauge, spikes when uncertainty rises. Traders can use VIX-related instruments to offset losses in their long positions when volatility surges.
This is exactly what happened on Monday — while most stocks were down, VIX instruments shot higher, providing a crucial layer of protection. The VIX was actually up nearly 40% at the market open Monday, and call options surged double that.
Another approach is buying put options on major indices like the S&P 500 (SPY) or the Nasdaq 100 (QQQ). When markets fall, these puts increase in value, helping balance out losses elsewhere in a portfolio. The key is not waiting until a sell-off starts to hedge — you need to have it in place before the drop happens.
Monday’s gap down was mostly contained within the Technology sector (XLK) and semiconductor stocks like Nvidia (NVDA) and Advanced Micro Devices (AMD).
Meanwhile, Financials (XLF) and Health Care (XLV) actually performed well. That’s why sector rotation strategies can also serve as a hedge. If you recognize that tech is overheated, rotating into defensive sectors can help reduce risk.
The traders who get wiped out in sell-offs are the ones who ignore warning signs. Last Wednesday, I pointed out in my Telegram channel that the market was flashing signals — divergence in the VIX, stretched tech valuations, and weakness in equal-weighted indices like RSP. These were clues that a shakeout was coming.
Hedging isn’t about predicting every move; it’s about being prepared for the inevitable. The goal isn’t to make every dollar possible in a rally but to protect yourself when the market pulls back. Because the reality is, those who stay in the game the longest are the ones who manage risk the best.
So next time you see a sharp drop like Monday’s, ask yourself: Were you ready for it? If not, it’s time to start thinking about how to add a hedge to your strategy.
Kane Shieh
Kane Shieh Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
P.S. These 3 Stocks Are the Safest on the Market
With the wild volatility in the stock market these few days, I’ve found THREE stocks to be in the safe zone.
I’ll share them with you if you live at 3 p.m. ET on Thursday, Jan. 30!
