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My first hedging attempts / more thoughts on hedges

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March 17, 2009 – Comments (2) | RELATED TICKERS: FAZ , FAS , SPY

Well...  American Express spoiled the fun.  But yesterday in the morning (when the market was soaring) I took out a few hedges.

1.  I sold calls against some percentage of the stocks I own.  Not a huge percentage, but not an insignificant one.  I didn't calculate the actual number.  They were all April calls so if we get a short term dip I'll be able to close them out at a profit or let them expire worthless.  If we get a big rally, they will force me to trim my portfolio at prices I pre-selected, and trimming after a big rally (should one transpire) is just good policy these days.

This tactic - selling covered calls (calls for which you own the shares) at prices you'd be happy to sell at - is just good policy.  No reason you can't generate dividend-like income of 5-15% of your portfolio this way (annually) in this market.  And if you carefully select prices and the like, you'll never come out a loser (because if you wind up losing your shares due to the options you sold, you will lose them at a price you pre-selected as good). 

2.  I trimmed some shares.  I dumped a pile of XL shares for $4.06 and bought 'em back for $3.6x, that was fun.  That thing (XL) is so all over the place that its scary and if one just simply traded XL over the last 3 months you'd be realy rich and/or have about a million free shares by now. 

3.  I bought puts on XLF and SPY, just under the money and expiring in April.  If we get a rapid drop the profit from those will partially compensate me for the pain felt in my long positions.

Its not a big hedge that will prevent me from any loss if the market swings down, but I can always take out a bigger one at some later date, like tomorrow.  But it is a hedge, and my first hedging strategy, and I'm pretty happy that I took it. 

I've got some more studying to do on options and the like to try and come up with the most cost-effective gain-protection strategies.  Other ones i'm toying with including

-going long FAZ.  FAZ is a leveraged (so very volatile) ETF focusing on financials.  At this point a significant percentage of my portfolio is focused on insurnace, BDCs, and banks.  A stake in FAZ could potentially shelter me from some downside losses.  This tactic shares one of the flaws of options - its value decays over time.  Not as rapidly as calls and puts, but it still decays. 

-shorting stocks.  I haven't ever shorted a stock and I have one mild moral hiccup about doing so:  in shorting you are rooting for society to lose wealth and for others to suffer, and taking an action that (at least in the short term) works to that end.  For now i'm going to avoid shorting anything...

So we'll test it and see how this works, and I'll spend some number of hours pouring over options prices and charts (if I can find any options charts) and see what I can come up with.  I know there's a way to minimize impact on upside swings while nicely cushioning the blow from drops, and I am going to find it. 

Nobody ever really learned anything without getting their feet wet.  :)

2 Comments – Post Your Own

#1) On March 17, 2009 at 1:37 AM, PrestonCheek (32.89) wrote:

-shorting stocks.  I haven't ever shorted a stock and I have one mild moral hiccup about doing so:  in shorting you are rooting for society to lose wealth and for others to suffer, and taking an action that (at least in the short term) works to that end.  For now i'm going to avoid shorting anything...

I look at shorting as corrections in the stock that you can make money on, it's much better that way. :)

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#2) On March 17, 2009 at 1:43 AM, checklist34 (99.73) wrote:

I guess its all how you frame it, Preston, always a bright side if you look around.

I read a comment by Julian Robertson (who returned something like 25%/yr for 24 years or some wild figure like that with the Tiger Fund) and he said something loosely like this:

"my job is to be long the 100 best companies and short the 100 worst companies, and if the 100 best don't do better than the 100 worst something is wrong"

In theory that strategy should lead to gains up or down.  The 100 worst (or 20 bad companies, anyway) will get beat up quicker in a bear market than 20 strong companies, making positive profits possible in a dropping OR rising market.

 

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