Implementing Hedged Long Exposure to AI: Levered Longs with Protective Options

Hook: How to Stay Long on AI — Without Losing Your Shirt

If you’re bullish on the next AI phase — Broadcom, Nvidia, and the new semiconductor/AI infrastructure winners — you face two stark pain points: you want magnified upside, but you can’t stomach large drawdowns. The market’s memory of 2022–2024 volatility and the sharp sector rotations of late 2025 taught investors a costly lesson: concentrated AI bets can double your upside and also double your losses. This guide shows a pragmatic, repeatable way to create levered long exposure to AI names while limiting downside with a structured put ladder and rules-based dynamic rebalancing.

Why this matters in 2026

AI adoption accelerated through 2024–2025 and entered a more capital-intensive phase by 2026. Broadcom (AVGO) and other infrastructure suppliers scaled up high-margin, AI-specific product lines; option chain liquidity for these names expanded materially. That means more efficient hedging is possible now than in prior cycles — but option premiums and margin costs still matter. The challenge for investors in 2026 is to capture leveraged upside without exposing the portfolio to catastrophic equity drawdowns or costly option time decay.

Strategy Overview — What You’ll Build

The approach is a three-part structure you can implement on a single AI name (e.g., Broadcom) or an AI basket:

1. Levered long exposure — 1.5x to 2x target leverage using margin, or controlled long-call positions (LEAPs or short-dated calls) to obtain leverage.
2. Protective put ladder — layered puts at staggered strikes/expiries to cap losses in stages rather than a single stop.
3. Dynamic rebalancing — rules that keep leverage near target, adjust hedge sizes as the underlying moves, and roll options to maintain efficient protection.

Why a Put Ladder (Not a Single Put)?

Buying a single at-the-money put gives immediate protection but is expensive and expires. Writing your entire protection as a ladder of strikes and expiries achieves two objectives:

• Cost management — deep OTM puts are cheaper, giving catastrophe protection without paying for full insurance.
• Gradual protection — you limit losses stepwise: small protection against modest drawdowns, heavier protection if the market plunges.
• Flexibility — you can roll individual rungs of the ladder as volatility and time premium change.

Step-by-step Implementation (Practical How‑To)

1) Define objectives and constraints

Answer the following before any trade:

• Target leverage: 1.5x or 2x? (We’ll use 2x in examples.)
• Maximum tolerable drawdown: e.g., 20% of portfolio value (net of hedges).
• Investment horizon: short-term (3–6 months) or strategic (12–24 months)?
• Liquidity and margin limits with your broker.

2) Construct the underlying levered exposure

Two practical routes:

1. Margin/Portfolio leverage: Borrow to buy additional shares. Simple, transparent delta of +2 per share if you target 2x. Cost: margin interest and recall risk for hard-to-borrow names.
2. Option-based leverage: Buy long-dated calls (LEAPs) or near-term calls for higher gamma. Pros: defined loss (premium); cons: time decay and vega exposure.

Example (2x via margin): You have $1,000,000. You want $2,000,000 long exposure to Broadcom. With 50% margin you hold $1,333,333 of stock but borrow $666,667 to reach roughly 2x — exact math depends on broker maintenance requirements. Alternative option example: buy call notional equal to $1,000,000 delta-equivalent using LEAPs (less capital, more vega).

3) Size the protective put ladder

Design a ladder to cover downside exposures created by leverage. Key principles:

• Match the notional of each put layer to the incremental exposure it must protect.
• Place near-term protection at higher strikes for early drawdown defense; deeper OTM, longer-dated rungs for crash protection.
• Total cost should fit your cost-budget (e.g., target annualized hedging cost of 2%–6% of notional).

Sample ladder (Broadcom, hypothetical numbers):

• Rung A — 1-month ATM puts covering 50% of leveraged exposure (fast protection but expensive).
• Rung B — 3–6 month puts 10%–15% OTM covering 100% of remaining leveraged exposure (moderate cost).
• Rung C — 12-month deep OTM puts (30%–40% OTM) covering 100% of notional for catastrophic tail risk.

Sizing example with numbers: $2,000,000 notional (2x). Suppose you want full protection down to a 30% drop in the underlying. You might buy:

1. $1,000,000 notional of 1-month puts at the 90% strike (very near-the-money) to protect immediate downside.
2. $1,000,000 notional of 6-month puts at the 80% strike to protect further drawdown.
3. $2,000,000 notional of 12-month puts at the 60% strike to cap catastrophic losses.

Because these rungs overlap, overall protection is stepwise rather than binary. You can tailor notional and strikes so total cost aligns with your budget.

4) Execute and manage costs

Execution best practices:

• Use limit orders and work orders on liquid option chains — Broadcom and other large AI names typically have tight markets in 2026.
• Consider staggered fills to reduce market impact.
• Offset cost with income strategies: sell far OTM calls to finance part of the put ladder if you’re comfortable capping upside beyond a strike.

5) Dynamic rebalancing rules

Design rebalancing around two control variables: target leverage and hedge ratio. Example rule set:

• Rebalance when leverage deviates by ±10% from target. If price rises and leverage falls, buy more underlying or sell calls; if price falls and leverage rises (because margin increases), sell shares or increase hedges.
• Adjust the put ladder when implied volatility (IV) moves beyond a threshold: e.g., if IV increases by >25% and premiums spike, buy longer-dated protection rather than expensive short-dated puts.
• Roll rungs 30–45 days before expiry if the protective function is still required; roll down the ladder as price recovers to reduce cost.

Automate these rules where possible. Use a spreadsheet or trading platform that calculates real-time position delta, gamma, and portfolio leverage.

Worked Example: $1M Portfolio, 2x on Broadcom (AVGO)

Assumptions (hypothetical mid-2026 prices): Broadcom at $1000 (round number to simplify). You have $1,000,000 cash and want 2x exposure to Broadcom with drawdown protection to -30%.

1. Target notional = $2,000,000 → 2000 shares at $1,000 each.
2. Buy 2000 shares financed by $1,000,000 cash + $1,000,000 margin (simplified).
3. Put ladder:
   • Rung 1: Buy 1000 notional 1-month puts at 90% strike ($900) — cost hypothetically $12 per contract → $12,000.
   • Rung 2: Buy 2000 notional 6-month puts at 80% strike ($800) — cost $40 per contract → $80,000.
   • Rung 3: Buy 2000 notional 12-month puts at 60% strike ($600) — cost $20 per contract → $40,000.
4. Total put cost in first year ≈ $132,000 → 13.2% of portfolio, which is high. To reduce cost, you could shrink Rung 1 and fund part of the ladder by selling covered or OTM calls. Alternatively, lower leverage to 1.5x or choose deeper OTM rungs.

Key takeaway: raw insurance is expensive. The ladder lets you tune the expense versus protection trade-off.

Optimizations and Variants

1) Collar with Ladder

Sell calls (caps upside) at strikes above your cost basis to offset put costs. Use wide-call strikes to preserve most upside while recouping premium.

2) Put-spreads and Calendar Structures

Instead of buying naked puts, use bear put spreads (buy a higher-strike put and sell a lower-strike put) to lower premium. Use calendar spreads to exploit elevated short-term IV while buying longer-term coverage.

3) Proxy Basket Hedging

If single-name options are too expensive, hedge AI sector exposure via index or ETF puts (for example, NVDA/NVDA-heavy indices or AI ETFs). These are often cheaper and avoid single-name idiosyncratic risk.

Risk, Cost, and Tax Considerations

• Costs: Option premiums, margin interest, bid-ask, and slippage. In 2026, key AI names have improved option liquidity, but premiums still rise sharply when IV spikes.
• Execution risk: Large orders can move the market, especially on options with thinner depth. Use iceberg or VWAP orders on the stock side; limit orders for options.
• Tax treatment: Single-stock options are usually taxed as capital gains/losses (consult your tax advisor). Spreads and closing rolls can affect short-term vs long-term gains. Watch for wash sale rules if you’re harvesting losses.
• Regulatory & margin risk: Brokers can change margin requirements or force reductions on concentrated, hard-to-borrow positions — plan for haircuts.

Monitoring and Stress-Testing

Build a dashboard that shows:

• Real-time portfolio delta and effective leverage.
• Value-at-risk (VaR) and scenario losses at -10%, -20%, -30% moves.
• Implied volatility surfaces for options in the ladder.

Stress test monthly. Simulate a 40% flash drawdown and confirm whether your ladder cushions losses to the intended level. If not, tighten hedges or lower leverage.

Case Study (Experience): A 2025–2026 AI Rotation

In late 2025, several AI infrastructure names experienced periods of elevated volatility as earnings and capex cycles diverged. Investors who bought 2x exposure without protection saw concentrated drawdowns when inventories and guidance disappointed. Conversely, a group of practitioners implemented a laddered put approach: they kept 1–2% monthly cost budgets, sold OTM calls to offset premiums, and rebalanced monthly. Their portfolios captured substantial upside during the AI deployment rally in early 2026 while limiting peak drawdowns to single-digit percentages relative to headline market swings.

"Structured protection allowed us to stay allocated through bouts of volatility rather than capitulate—this is the practical benefit of a put ladder plus rebalancing." — Hedge practitioner (anonymous)

Checklist Before You Trade

• Confirm liquidity on option chain for chosen strikes/expiries.
• Backtest simple scenario P&L for your chosen ladder and leverage across 2018–2026 shocks.
• Set automated alerts for leverage deviation and IV jumps.
• Allocate a fixed budget for hedges and measure hedge cost as a percent of portfolio.
• Document tax and margin implications with your advisor.

Final Practical Tips

• Prefer staggered expiries to avoid simultaneous decay cliffs.
• Use deep OTM long-dated puts for tail risk and near-term rungs for active drawdown defense.
• Consider reducing leverage when IV spikes to a level that makes hedging prohibitively expensive.
• Keep position sizes diversified — don’t overweight a single AI name beyond what your hedges can cover.

Conclusion — Why This Works For AI Bulls in 2026

AI leaders like Broadcom play a central role in the next phase of deployment. A disciplined, structured strategy that combines levered long exposure with a staged put ladder and dynamic rebalancing lets investors participate in upside while maintaining explicit downside limits. The trade-offs are clear: protection costs money, leverage amplifies both gains and losses, and active management is required. But in a world where AI adoption and capital cycles are accelerating, this approach gives you a repeatable, rule-based way to stay invested through volatility — instead of being forced out after a sharp drawdown.

Call to Action

Ready to model this for your portfolio? Download our free hedging worksheet and step-by-step trade template (spreadsheets for sizing ladders, rebalancing triggers, and P&L scenarios), or contact our derivatives desk for a tailored construct for Broadcom and your AI basket. Act now — market conditions and IV regimes can shift fast, and the best time to prepare a hedge is before you need it.

Risk reminder: This article is for educational purposes and does not constitute financial or tax advice. Options and margin trading involve risks, including loss of principal and unlimited losses in some strategies. Consult your broker and tax advisor before executing strategies discussed here.

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