How Do You Hedge With Options?

The investment landscape is shifting rapidly. In 2025 alone, over a thousand new ETFs launched, flooding the market with complex products designed to generate income, buffer against volatility, and define investment outcomes. For the average investor, this explosion of choice creates a new challenge: distinguishing between useful tools for risk management and unnecessary complexity.

Beyond the technical mechanics of hedging, wealth management ultimately circles back to personal goals. Whether it’s deciding if financial independence is actually fulfilling, or navigating the economics of a single-income household, the math must always align with your psychology. We sat down with Brian Jacobs from Aptus ETFs to demystify option-based strategies and dove into the behavioral side of wealth preservation.

Key Takeaways

• Option strategies define risk: Techniques like "collars" allow investors to buy downside protection (puts) by selling upside potential (calls), effectively removing tail risk in exchange for capped returns.
• Buffer ETFs are psychological tools: These products provide peace of mind for retirees by setting a floor on losses, though they historically capture only 60% to 80% of an equity bull market.
• Market dominance is cyclical: While US stocks have dominated for a decade, historical data from the 1970s and 80s suggests international markets often take the lead for long stretches.
• Purpose beats leisure in retirement: Early retirement doesn't guarantee happiness; studies suggest that maintaining work-like engagement and social connections is vital for longevity.
• The "Time Dividend" of single-income households: The decision for one spouse to stay home isn't just a math problem regarding daycare costs—it provides a buffer of time that reduces household stress.

Demystifying Option-Based ETFs

Options were once the domain of aggressive traders and hedge funds. Today, they are being packaged into ETFs accessible to retail investors. To understand these products, you have to strip away the jargon and view them as a form of insurance.

At its core, an option is simply the right to buy or sell an asset. In the context of "hedged equity" or "defined outcome" ETFs, fund managers use options to shape the return profile of a portfolio. They typically employ two main levers:

1. Buying Puts (The Floor): This is the insurance premium. The fund pays money to guarantee that if the market drops below a certain level, the portfolio stops losing value.
2. Selling Calls (The Cap): To pay for that expensive insurance, the fund sells the rights to future upside. If the market rips 30% higher, the fund might be capped at 15%.

The Collar Strategy

One of the most popular implementations is the "collar." This strategy holds the underlying stocks but wraps them in options to cut off the extreme tails of the distribution curve.

"In the ideal world, you're pushing the cap—where you're capped out of profits—as high as possible, and having the protection as close to the current price as possible."

The trade-off is explicit. In a raging bull market where stocks are up 40%, a collared strategy will underperform because the upside is capped. However, the goal isn't to beat the S&P 500 in a straight line; it is to mitigate the sequence of returns risk. By removing the left tail (catastrophic losses), investors can often compound wealth more steadily, avoiding the emotional panic that leads to selling at the bottom.

Fixed Income Replacements

Another evolution in this space involves using options as a bond alternative. Strategies like the Aptus Defined Risk ETF (DRSK) utilize a core of investment grade corporate bonds to generate yield, then use that yield to buy "calls" on the stock market. This creates a hybrid asset class: the stability of bonds with the potential for equity-like upside when the market rallies, and a built-in shock absorber when it falls.

The Rise of Buffer ETFs

Buffer ETFs have grown from a niche product to a $200 billion industry, with projections hitting nearly $700 billion by the end of the decade. These funds offer a "set it and forget it" promise: you are protected against the first 10%, 15%, or 20% of market losses over a specific period.

However, investors must manage their expectations regarding returns. You cannot have full downside protection and full upside participation simultaneously. Historically, a buffer strategy with a 15% downside protection level captures roughly 60% to 80% of the market's upside.

This makes buffer ETFs less of a tool for aggressive growth and more of a behavioral bridge. For a retiree with a $2 million portfolio, the fear of a 20% drawdown might drive them entirely to cash. If a buffer ETF keeps them invested by capping their potential loss, the "cost" of capped upside is worth the price of staying in the market.

International Stocks: A Cycle Delayed?

Diversification has felt painful for US-based investors for over a decade. Since roughly 2010, the US stock market has trounced international developed and emerging markets. Recently, however, international stocks showed a pulse, outperforming the US in 2024 for the first time since 2017.

Is this a blip or a regime change? History suggests caution against "recency bias."

• The 1970s and 80s: International stocks outperformed the US by massive margins, largely driven by the boom in Japan.
• The 1990s: The cycle flipped to US dominance during the tech boom.
• The 2000s: International stocks took the lead again during the "lost decade" for US equities.

Currently, the US represents about 4% of the global population and 25% of global GDP, yet it comprises 65% of the global stock market capitalization. While US companies are undeniably powerful, mean reversion is a powerful force in finance. Betting that the US will outperform forever ignores the cyclical nature of geopolitical and economic power.

The Existential Crisis of Financial Independence

Reaching a "not to brag" level of wealth—where work becomes optional—often triggers an unexpected identity crisis. Many aggressive savers spend decades focused on the number, only to realize they have no plan for the lifestyle.

If you enjoy working, financial independence does not require you to stop. In fact, total cessation of work can be detrimental. A study conducted on Shell employees found that those who retired at 65 actually had lower mortality rates than those who retired at 55. While such studies have variables (health issues often force early retirement), the correlation between purpose, social connection, and longevity is strong.

Instead of quitting, financially independent individuals should consider applying three rules to their career:

1. The No Stress Rule: If a project causes anxiety, you have the capital to say no.
2. The No Regrets Rule: Work should never conflict with family time or health.
3. The "No Jerks" Rule: Only work with people you genuinely like and respect.

Retirement is a relatively modern invention. For most of human history, people worked until they physically couldn't. The goal shouldn't be idleness, but rather autonomy over your labor.

The Economics of the Stay-at-Home Spouse

Deciding whether one spouse should leave the workforce is often framed as a simple math problem: Does the spouse's income exceed the cost of childcare? If the net difference is slim, many opt for the parent to stay home.

However, this calculation often ignores the "iceberg" of hidden benefits and costs.

The Hidden Variables

The Cost of Career Interruption: Stepping out of the workforce doesn't just erase current income; it halts compounding salary growth and 401(k) contributions. Re-entering the workforce years later often happens at a lower pay grade.

The Value of Time: Conversely, the benefits of a stay-at-home parent are often undervalued. This arrangement provides a "time dividend." When a child is sick, there is no scramble to cancel meetings. Household logistics are managed during the day, leaving evenings and weekends truly free for family bonding rather than chores. This reduction in household stress is difficult to quantify but holds immense value.

The "Trial Run" Strategy

For couples considering this shift, the best approach is a financial fire drill. Before quitting, spend six months living strictly on the single income that will remain. Save 100% of the second spouse's income during this period.

This serves two purposes: it stress-tests your budget to see if the lifestyle is sustainable, and it builds a substantial cash buffer to smooth the transition if you decide to proceed.

Conclusion

Whether you are hedging a portfolio against a market crash or hedging your lifestyle against burnout, the common thread is trade-offs. Buffer ETFs trade upside for safety; stay-at-home parenting trades income for time; international diversification trades short-term comfort for long-term robustness. There is no perfect allocation—only the one that allows you to stick to your plan when the world gets volatile.