Hedging is insurance for your portfolio. The simplest hedge is a protective put — you own shares and buy a put option below the current price. If the stock tanks, the put increases in value, offsetting your losses. Own 100 shares of a $100 stock and buy a $90 put — the worst that happens is you lose $10 per share plus the put cost. Without the put, the stock could go to zero. Professional fund managers hedge constantly — it's not about being scared, it's about being smart.

A collar strategy takes hedging further by making it cheaper. You own the stock, buy a protective put below (costs money), and sell a covered call above (brings in money). The call premium helps pay for the put, sometimes making the hedge nearly free — a 'zero-cost collar.' The trade-off is capped upside at the call strike. But you're protecting your downside for almost nothing while still participating in moderate upside. Big money uses collars around earnings and major economic events.

Inverse ETFs are hedging tools that don't require options knowledge. An inverse ETF goes up when the underlying index goes down. If the S&P 500 drops 1%, an inverse S&P 500 ETF gains roughly 1%. Critical warning: leveraged inverse ETFs are designed for daily rebalancing and suffer from decay over time. They are NOT meant to be held for weeks or months. Use them as tactical, short-term portfolio insurance only. Misusing leveraged ETFs has wiped out more accounts than most realize.

The key to hedging is timing the cost. If you spend 3% annually on hedges and the market goes up, that's a drag on returns. Hedge strategically: increase hedges when volatility is low (options are cheap) and risk is high (markets are euphoric). Reduce hedges when volatility is already high (options are expensive) and fear is everywhere. Buy insurance when it's cheap and nobody thinks they need it. That's contrarian risk management.