Texas Hedge
Texas Hedge
When Hedging Makes Risk Worse
What Is a Texas Hedge?
A Texas hedge is a trading strategy where, instead of offsetting risk like a traditional hedge, the trader takes on additional risk in the same direction. It’s a phrase rooted in humor and irony because it does the exact opposite of what hedging is meant to do.
Real Definition vs. Traditional Hedging
Traditionally, a hedge means protecting a position by taking the opposite side in a correlated asset (e.g., buying puts to hedge a long stock). But a Texas hedge goes the other way: for example, being long a stock and buying calls — doubling down on bullish exposure instead of reducing risk.
This approach is aggressive, speculative, and often used by overconfident traders or misunderstood by beginners.
Why Is It Called a “Texas Hedge”?
The name is tongue-in-cheek and reflects the stereotype of Texas-style big-risk thinking, go big or go home. It implies bold, risky moves without regard for traditional caution.
This type of “hedge” might be based on high conviction or simply poor risk management. The term likely originated from the commodities and futures markets, where traders might be long cattle futures and buy more instead of hedging the risk.
Common Examples of a Texas Hedge
Example 1: Stock + Call Options
A trader buys 1,000 shares of $AAPL and then buys 10 at-the-money call contracts. Instead of hedging the long stock with puts, they just add even more bullish exposure.
Example 2: Futures Contracts
A commodity trader is long crude oil futures. Prices rise. Instead of locking in gains or using options, they double their position — effectively creating a Texas hedge.
Example 3: Margin Amplification
A trader is already in a leveraged ETF and then opens another leveraged position in the same direction — amplifying volatility and risk.
When Traders Use a Texas Hedge (And Why)
1. High Conviction
Some traders are so confident in their market read that they pile on additional exposure rather than reduce it.
2. Speculation
It’s often used when chasing outsized returns in a short period — especially with options or futures.
3. Lack of Understanding
Beginners sometimes confuse hedging with adding protection, not realizing they’re increasing risk by aligning both positions the same way.
4. Gambling Mentality
Some traders lean on YOLO-style strategies, hoping to hit a big win. These often backfire.
The Risk of Using a Texas Hedge
A Texas hedge is inherently risky because:
-
It multiplies exposure
-
There is no offsetting position
-
It can lead to compounded losses
-
It goes against risk management principles
This strategy is typically frowned upon by institutional investors, who focus on capital preservation.
The Psychology Behind the Texas Hedge
Many traders fall into this trap because of:
-
Overconfidence bias
-
Fear of missing out (FOMO)
-
Greed and reward-chasing
-
A belief they can “outsmart the market”
Behavioral finance studies often highlight these biases as core reasons why retail traders blow up accounts.
When It Accidentally Happens
Sometimes, traders unintentionally create a Texas hedge. For example:
-
They own a long position and forget they also bought deep ITM calls
-
They misunderstand the role of delta in options exposure
-
They’re unaware of correlation between assets and think they’re diversified when they’re not
Texas Hedge vs. Proper Hedging
| Criteria | Texas Hedge | Traditional Hedge |
|---|---|---|
| Objective | Increase exposure | Reduce risk |
| Direction | Same as underlying | Opposite or offsetting |
| Risk | Increased | Decreased |
| Used by | Speculators | Risk managers |
Should You Ever Use a Texas Hedge?
In rare cases, yes, but with strict rules and full awareness of the risk.
It could be considered if:
-
You have small positions and want leverage with defined risk (e.g., via options)
-
You’re managing other positions and using this as a calculated satellite play
-
You’re using stop-losses and capital limits
But in most cases, a Texas hedge is not a sound strategy unless you’re fully prepared for the downside.
Real-Life Cautionary Tale
In 2020, a trader who was long $TSLA added aggressive call options during the rally. When the stock pulled back, he not only lost money on the options but also took a hit on the shares, a classic case of the Texas hedge wiping out gains.
Better Alternatives to the Texas Hedge
Instead of doubling down, traders can:
-
Use protective puts
-
Set stop-losses or trailing stops
-
Hedge with inverse ETFs or sector pairs
-
Reduce position size
-
Diversify across non-correlated assets
These strategies preserve capital and keep emotions in check, two things the Texas hedge fails to do.
Stay Connected and Take the Next Step
If you’re finding value in our content, we’d love to keep in touch.
? Like what you’re reading? Sign up for our free newsletter and get trading insights, market updates, and educational content delivered straight to your inbox.
? Ready to take your trading to the next level?
Join one of our professional trading services and get direct access to strategies, setups, and real-time alerts that can help you grow.
? Explore our services below and start building your edge in the market:
- Day Trading Room
- Swing Trading Room(Short-term)
- Small Account Mentorship
- SPX Trading Alerts(Alerts Only)
- Revolution Swings(Alerts Only)
Related Articles
To your success,
Billy Ribeiro is a globally recognized trader renowned for his mastery of price action analysis and innovative trading strategies. He was personally mentored by Mark McGoldrick, famously known as “Goldfinger,” Goldman Sach’s most successful investor in history. McGoldrick described Billy Ribeiro as “The Future of Trading,” a testament to his extraordinary talent. Billy Ribeiro solidified his reputation by accurately calling the Covid crash bottom, the 2022 market top, and the reversal that followed, all with remarkable precision. His groundbreaking system, “The Move Prior to The Move,” enables him to anticipate market trends with unmatched accuracy, establishing him as a true pioneer in the trading world.
Connect with us:
