Whats the best hedging strategy?
Well my big bet from last week and earlier this week on has paid off pretty handsomely and my portfolio finished the week up almost 30%, and i'm not up overall by almost 20% ... with no short term profits to pay taxes on, since I started making my own investing decisions in December.
My profssionally managed money is beating the S&P, but it is down over the same time period.
And now, after 4 days of strength and a big rally, I'm interested in hedging against losses if the market dips down again.
I'm also concerned that Q1 earnings might be ugly, and that the market might come back under pressure during Q1 earnings season. I absolutely positively make no claim to being good at forcasting short term market moves, but its possible for me to envision a positive bullish market for a few weeks here turning bearish when Q1 earnings season kicks off. And i think that (the end of Q1 earnings season) may well be the end of this amazing bear market.
So i'm interested in hedging my current gains against losses while staying generally very long the market. I'm curious what my fine fellow fools consider the best overall hedging strategy?
These come to mind:
1. take some profits and sit on more cash than I have right now. This would reduce my portfolios volatility both to the up and down sides. This is a prudent step ahead of an earnings season that might bring some pain... And it gives me the ability to place larger bets on stocks that I like but which might dip during earnings season.
2. short the market or individual stocks. This could in theory lock me in to current profit levels for a period of time, or if I partially shorted my portfolio or shorted the index it could be a partial hedge against movements. What I don' tlike about shorting stocks is A) right now the market is still incredibly oversold and I think shorting a market thats at these levels is risky business. Also B) there's no limit to your downside with a short, but there's a big limit to your upside.
3. Buying puts on the broad index or individual stocks (SPY, maybe GE or BAC). This i like much more than shorting things. If you buy a put on SPY and the market drops, the value of that put can lurch up far, far more than the drop in the market. The same applies to it losing value if the market rises. But the total downside of the put hedge is perhaps 80% of the cost of the puts as they won't go to zero and if the market turns bullish during earnigns season I can always dump them when I don't feel worried about Q1 earnings... The risk/reward here seems good, frankly, the only problem would be if the S&P went up, but my stocks went down, in which case I'd ahve a double whammy. This would be alleviated if I could get puts on my specific stocks of course, but there isn't alot of put volume for some of them.
4. Selling calls against my portfolio at prices I can't refuse. I own alot of RCL which i'm up on. :) If there's any volume of options for RCL I could sell say $10 or $15 calls reaching out a few months. If those stocks drop, the value of the calls drops and I can buy them back at a profit, partially compensating me for loss in the stock. This could work provided there's any money in the calls at prices I would be happy to sell for and provided that theres any volume of options in the tickers I own. There's no real downside risk here if the calls you sell are at prices you are satisfied with. But its not likely that this will lead to a high percentage of hedging...
5. going long on something thats inversely related to the market. gold maybe, gov't bonds maybe... I don't like those ideas as gold is still overpriced IMO and bonds are still really badly elevated. But i'm not above doing some of these things...
Anything I'm missing? Buying puts and selling calls seems to be the best overall strategy... Or am I somehow not seeing the bigger picture?