TEM

Should I consider adjusting my position size, hedging, or using options to manage potential volatility from this news?

Created August 06, 2025 at 07:52 PM

Bottom line: Because the announcement of a potential class‑action lawsuit against Tempus AI (NASDAQ TEM) can create short‑term price turbulence—especially as the August 12 deadline for investors to join the suit approaches—it is prudent to look at the trade‑off between staying exposed to the stock and protecting that exposure. You can do this by (1) right‑sizing the position you hold, (2) adding a hedge, or (3) using options to shape a “controlled‑risk” profile. Below is a step‑by‑step framework you can apply, together with concrete option‑trade ideas and practical considerations.

1. Why the news matters for volatility

What happened	Why it matters for the market
Class‑action lawsuit announced – investors who bought TEM between 6 Aug 2024 and 27 May 2025 can still join (deadline 12 Aug 2025).	Legal exposure creates uncertainty about future cash‑flows, possible settlement costs, and reputational risk. The market often reacts to the probability of a negative outcome (e.g., a large settlement) and to the process (e.g., filing, discovery, court rulings).
Deadline is only a few days away (12 Aug 2025).	The most intense price reaction typically clusters around the filing deadline and any subsequent court filings. Expect a volatility spike in the next 5‑10 business days.
Potential “substantial losses” for investors – the firm is positioning the suit as a remedy for those losses.	If the market perceives the suit as credible, the downside risk rises; if the suit is seen as frivolous, the upside could be muted. The uncertainty itself is enough to widen the bid‑ask spread and increase implied volatility (IV) on options.

Takeaway: The stock is likely to trade in a wider‑range environment for the short term, with the biggest swing potential occurring before and immediately after 12 Aug 2025.

2. Position‑size considerations

Scenario	What to do
You are already long a sizable amount of TEM (e.g., >5 % of daily volume)	• Trim part of the position now to bring exposure to a level you are comfortable holding through a possible 10‑30 % swing. • If you still want upside, keep a core “core‑position” (e.g., 20‑30 % of current holdings) and hedge the rest.
You are modestly long (≤1 % of daily volume)	• No immediate size change is required, but add a protective hedge (see Section 3) to guard against a sudden drop.
You are short or neutral	• You may add a long side if you think the market will over‑react on the downside, but be aware of unlimited upside risk. A delta‑neutral option structure (e.g., long‑call/short‑put) can give you exposure without the need to hold the stock outright.

Rule of thumb: Keep the maximum potential loss (after any hedge) at a level you can comfortably absorb—typically ≤2 % of your total portfolio for a single‑stock exposure, unless you have a high‑conviction, high‑risk tolerance.

3. Hedging options – “protective‑put” or “collar” strategies

3.1. Simple protective put

Trade	Why it works
Buy a TEM put with a strike ~5‑10 % below the current market price, expiration just after the deadline (e.g., the nearest weekly or monthly contract that expires 2‑3 weeks after 12 Aug).	The put caps your downside while letting you stay long the stock for upside. Because the implied volatility (IV) is likely elevated now, the put premium will be relatively expensive, but the cost is offset by the protection it provides during the volatility window.

Practical tip:

- If you own 1,000 TEM shares (≈$30 k at $30/share) and buy 1 TEM put (100 shares) at a $28 strike, you are protected for 2,000 shares. You can either buy 2 puts (full protection) or 1 put (partial protection) and keep the rest un‑hedged.

- Break‑even analysis: You’ll need the stock to stay above $28 + premium to profit after the hedge. If the premium is $1.50, break‑even = $29.50.

3.2. Collar (protective put + short call)

Trade	Why it works
Long TEM + sell a call (out‑of‑the‑money, e.g., 10‑15 % above current price) + buy a put (same strike as the call you sold).	The short call funds part of the put premium, reducing the net cost of protection. You cap upside at the call strike, which is acceptable if you are comfortable limiting upside in exchange for cheaper downside protection.

Example:

- Current price: $30.

- Buy 1 TEM put @ $28 strike (premium $1.50).

- Sell 1 TEM call @ $33 strike (premium $0.80).

- Net cost = $1.50 – $0.80 = $0.70 per share.

- Result: You are protected below $28, and you can still capture upside up to $33.

3.3. Volatility‑play (long straddle/strangle)

If you expect* a big move but are unsure of direction, you can buy both a call and a put (same expiry) near‑the‑money (straddle) or at different strikes (strangle). This is a pure volatility trade—you profit if the stock moves enough to overcome the combined premium.

When to use: Only if you have a high conviction that the price will swing >30‑40 % in either direction, and you are comfortable paying the high premium that comes with elevated IV.
Risk: Unlimited loss if the stock stays within the “premium‑paid” range.

4. Timing the hedge

When to implement	Rationale
Now (within the next 1‑2 days)	Implied volatility is still rising as the market digests the class‑action news. Buying protection now locks in the current IV level before any potential “volatility crush” after the deadline.
Just before the deadline (≈ Aug 10‑12)	If you want to minimize premium cost, you could wait for IV to peak and then buy a put. However, you risk a pre‑deadline price drop that could already erode value.
After the deadline	If the stock survives the deadline with little price impact, you can re‑enter with a smaller hedge or even go un‑hedged, as IV often collapses after the event.

Suggested approach: Buy a protective put now (or a collar) to lock in protection before the deadline. If the premium feels too high, you can size the hedge partially (e.g., 50 % of your position) and add more later if the price moves sharply.

5. How to size the hedge relative to your position

Portfolio size	TEM exposure	Suggested hedge ratio
Small (≤5 % of total portfolio)	1,000 shares	Full hedge (2 puts) or partial (1 put) if you want to keep some upside.
Medium (5‑15 % of portfolio)	2,000‑5,000 shares	Full hedge for 50‑70 % of the position; keep the rest un‑hedged for upside.
Large (>15 % of portfolio)	>5,000 shares	Partial hedge (30‑50 %); consider a collar to reduce net cost, or use futures/options on a broader index if you want to diversify risk.

6. Additional practical tips & caveats

Liquidity:
- TEM options are thinly traded compared with large‑cap stocks. Expect wider bid‑ask spreads. Use limit orders and consider trading in the mid‑day window (10 AM‑2 PM ET) when volume peaks.
Tax considerations:
- Protective puts held >1 year may qualify for long‑term capital‑gain treatment on the underlying shares if you later sell.
- Short‑term option gains are taxed at ordinary income rates.
Margin & assignment risk:
- If you sell a call (collar) and it gets in‑the‑money before expiration, you could be assigned early, forcing you to deliver shares at the strike price. Ensure you have enough cash or margin to cover this.
Event‑driven volatility:
- The actual filing of the class‑action paperwork (court docket, press release) could cause a sharp price move on the day of filing (likely Aug 12). Be prepared for gap risk—a stop‑loss order may not trigger at the expected price.
Fundamental overlay:
- If you are a long‑term holder of TEM because you like the AI business model, the hedge protects the short‑term “noise” while you stay invested for the longer upside.
- If you are a speculative trader only interested in the short‑term catalyst, you may choose to exit the position entirely before the deadline to avoid the volatility altogether.

7. Decision‑tree summary

Do you want to stay long TEM?
   └─ Yes → 1) Reduce size if exposure > your risk tolerance.
            2) Add protective put (or collar) now.
            3) Keep hedge at 50‑100% of position based on risk appetite.
   └─ No  → 1) Close position before Aug 12.
            2) If you still want upside, consider a delta‑neutral spread (long call/short put) or a short‑term call option.

TL;DR (actionable checklist)

Step	What to do
1️⃣ Assess exposure – calculate how many TEM shares you own vs. portfolio size.
2️⃣ Decide hedge depth – full, 50 %, or none, based on your risk tolerance.
3️⃣ Enter a protective put (or collar) now, with expiration 2‑3 weeks after Aug 12 (e.g., the Aug 19 or Sep 20 weekly/monthly).
4️⃣ Monitor IV and price – if IV spikes, you may add a second put or tighten the collar.
5️⃣ Re‑evaluate after deadline – if the stock stabilizes, you can unwind the hedge or re‑size.

Bottom line

Given the legal exposure, the imminent deadline, and the likely surge in implied volatility, most prudent investors would either:

Trim the position to a comfortable size and put on a protective put (or collar) to guard against a downside move, or
Stay fully invested but hedge 50‑100 % of the exposure with a put/collar now, accepting the higher premium as insurance against a potentially sharp drop around Aug 12.

If you are comfortable with the underlying business and view the lawsuit as a short‑term “noise” event, the protective‑put/collar approach lets you stay long while capping downside. If you are risk‑averse or the position is already large relative to your portfolio, reducing size first and then hedging the remainder is the safer route.