How to hedge a long stock position that does not have options
If there are no traded options in a company you can get your broker to write OTC options but this may not be possible given some restrictions on accounts. Going short on futures may also be an option. You can also open a downside CFD (contract for difference) on the stock but will have to have margin posted against it so will have to hold cash (or possibly liquid assets if your AUM is large enough) to cover the margin which is unutilized cash in the portfolio that needs to be factored into any portfolio calculations as a cost. Diversifying into uncorrelated stock or shorting correlated (but low div yield) stock would also have the same effect. stop loss orders would probably not be appropriate as it is not the price of the stock that you are concerned with but mitigating all price changes and just receiving the dividend on the stock. warning: in a crash (almost) all stocks become suddenly correlated so be aware that might cause you a short term loss. CFDs are complex and require a degree of sophistication before you can trade them well but as you seem to understand options they should not be too hard to understand. You could always maintain a limit order to sell at a price you're comfortable with.
The answer is that the trader is hoping to profit from a potential rise in Implied volatility. He is isolating his exposure to IV only and mitigating his risk to the directional move of the underlying by hedging with the underlying. Basically, his delta is neutral. His gamma is positive and a potential source of profit, and his theta is negative which is a potential source of loss. He hopes that the profits from long gamma will overcome the loss from the short theta. he achieves this by actively gamma scalping to remain delta neutral over the life of the option. First, I want to point out that your question contains an assumption. Does anyone make significant money trading low volume stocks?  I'm not sure this is the case - I've never heard of a hedge fund trading in the pink sheets, for example. Second, if your assumption is valid, here are a few ideas how it might work: Accumulate slowly, exit slowly.  This won't work for short-term swings, but if you feel like a low-volume stock will be a longer-term winner, you can accumulate a sizable portion in small enough chunks not to swing the price (and then slowly unwind your position when the price has increased sufficiently). Create additional buyers/sellers.  Your frustration may be one of the reasons low-volume stock is so full of scammers pumping and dumping (read any investing message board to see examples of this).  If you can scare holders of the stock into selling, you can buy significant portions without driving the stock price up.  Similarly, if you can convince people to buy the stock, you can unload without destroying the price.  This is (of course) morally and legally dubious, so I would not recommend this practice. "If the strike price closest to the underlying has high open interest, the options expiration is a bigger event.   For instance:  stock is at $20 w/ average volume of 100,000 shares per day.    20 strike has 1000 open interest.   In this example the stock will ""most likely"" pin at 20 if we were expiring tomorrow.     As u prob know, long calls at 19.90 close, turn into stock....long puts at 20.10 turn into short stock.   Option pros (high % of volume) dont want to be short or long after expiration.   Long call holders will sell above 20 to hedge, and long put holders will buy below 20.   1000 open interest is equivalent to 100,000 shares.   That's the same amount as the average volume.   Stock can't really move until after expiration.   If I am long 10 $20 calls, and short 1000 shares I am flat going into expiration.....unless the stock gets smoked and now I am synthetically long a put....Short stock + long call= Long Put Then watch out cause it was artificially locked down." "The essence of hedging is to find an investment that performs well under the conditions that you're concerned about. If you're concerned about China stock dropping, then find something that goes up in value if that asset class goes down.  Maybe put options on a Chinese index fund, or selling short one of those funds? Or, if you're already ""in the money"" on your Chinese stock position, set a stop loss: instruct your broker to sell if that stock hits X or lower.  That way you keep some gains or limit your losses.  That involves liquidating your position, but if you've had a nice run-up, it may be time to consider selling if you feel that the prospects are dimming." If you really did have a large share size, a market order would move the price more so in your desired direction. Although your cost basis would be less ideal. Just use limit orders and scale in to a position. You can also exercise puts to be short stock "From some of your previous questions it seems like you trade quite often, so I am assuming you are not a ""Buy and Hold"" person. If that is the case, then have you got a written Trading Plan? Considering you don't know what to do after a 40% drop, I assume the answer to this is that you don't have a Trading Plan. Before you enter any trade you should have your exit point for that trade pre-determined, and this should be included in your Trading Plan. You should also include how you pick the shares you buy, do you use fundamental analysis, technical analysis, a combination of the two, a dart board or some kind of advisory service? Then finally and most importantly you should have your position sizing and risk management incorporated into your Plan. If you are doing all this, and had automatic stop loss orders placed when you entered your buy orders, then you would have been out of the stock well before your loss got to 40%. If you are looking to hang on and hoping for the stock to recover, remember with a 40% drop, the stock will now need to rise by 67% just for you to break even on the trade. Even if the stock did recover, how long would it take? There is the potential for opportunity loss waiting for this stock to recover, and that might take years. If the stock has fallen by 40% in a short time it is most likely that it will continue to fall in the short term, and if it falls to 50%, then the recovery would need to be 100% just for you to break even. Leave your emotions out of your trading as much as possible, have a written Trading Plan which incorporates your risk management. A good book to read on the psychology of the markets, position sizing and risk management is ""Trade your way to Financial Freedom"" by Van Tharp (I actually went to see him talk tonight in Sydney, all the way over from the USA)." "This doesn't make sense to me. Writing a covered call gives him a long delta position - the exact opposite of what he wants. And the tax losses won't turn a losing position into a winning one.  Is there something I'm missing?  Edit: Also, doesn't ""shorting against the box"" mean he has to have a long position, and short against that? That means you've got zero net delta, which isn't very useful at all..." There are a number reasons to hedge a position.  Here are some of the more common: