Hedge
Friday, November 10, 2006 at 01:25PM
To hedge or not to hedge, that is the question. To hedge is to take an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract, option, or stock position.
Brett was the first response to the post earlier, so as usual "first post wins." All the suggestions were great, and a few I have jotted down for future posts. I liked the weekly idea of a WWJD- post. I would need some help on specifics though.
Back to hedging. Brett asked how do I do this in my account. To give a simple response I diversify. As an option trader this means to not only take a bullish stance on the market, but to take a bearish stance as well. I never trade 100% with the market. I always look for a few trades I can take on weak stocks. In case I am wrong on the direction of the market, it is nice to have positions that will benefit in this instance. As usual, if the market were bullish, I would find weak groups, weak stocks and pick up a few puts.
Occasionally at times when I am not 100% sure on the direction of the market I will take an offsetting position in an index or index tracking investment. Such as we sit right now where the market could eventually top, I have a few OTM puts that I picked up as we turned down from our last top to protect me if the market decides to go bearish. This way, as I lose value on the calls, the puts offset this a little.
Hedging is a personal decision one must make. This means you are essentially betting against yourself and placing this bet with your money. As your accounts get larger, this could be a cheap way to protect yourself.
Back to the post suggestion...In response to all the personal questions about how I allocate my funds....I don't think it is relevant to everyone reading. Keep in mind that my goals, risk tolerance, and age is different than most investors. I am not interested in generating income, I am interested in generating aggressive growth.
However, in order not to disappoint, I will give a few generalities. I am not so thorough that I actually calculate the percentages of what I do and when I do it. I find reasons to do whatever I want whenever I want. To try and illustrate how I do things, here are some GENERALITIES.
Normally I have 40-50% as a cash position.
I would say on average that I am using 40% trading options. (Sometimes more, sometimes less)
I would say on average that I am using 10-15% trading stock positions.
Like I said, I don't want to get more specific than that because this is an aggressive way to do things. Please do not construe this as a method of how you should treat your own portfolio.
I will be back to post after I record the Market Cast.
Brett was the first response to the post earlier, so as usual "first post wins." All the suggestions were great, and a few I have jotted down for future posts. I liked the weekly idea of a WWJD- post. I would need some help on specifics though.
Back to hedging. Brett asked how do I do this in my account. To give a simple response I diversify. As an option trader this means to not only take a bullish stance on the market, but to take a bearish stance as well. I never trade 100% with the market. I always look for a few trades I can take on weak stocks. In case I am wrong on the direction of the market, it is nice to have positions that will benefit in this instance. As usual, if the market were bullish, I would find weak groups, weak stocks and pick up a few puts.Occasionally at times when I am not 100% sure on the direction of the market I will take an offsetting position in an index or index tracking investment. Such as we sit right now where the market could eventually top, I have a few OTM puts that I picked up as we turned down from our last top to protect me if the market decides to go bearish. This way, as I lose value on the calls, the puts offset this a little.
Hedging is a personal decision one must make. This means you are essentially betting against yourself and placing this bet with your money. As your accounts get larger, this could be a cheap way to protect yourself.
Back to the post suggestion...In response to all the personal questions about how I allocate my funds....I don't think it is relevant to everyone reading. Keep in mind that my goals, risk tolerance, and age is different than most investors. I am not interested in generating income, I am interested in generating aggressive growth.
However, in order not to disappoint, I will give a few generalities. I am not so thorough that I actually calculate the percentages of what I do and when I do it. I find reasons to do whatever I want whenever I want. To try and illustrate how I do things, here are some GENERALITIES.
Normally I have 40-50% as a cash position.
I would say on average that I am using 40% trading options. (Sometimes more, sometimes less)
I would say on average that I am using 10-15% trading stock positions.
Like I said, I don't want to get more specific than that because this is an aggressive way to do things. Please do not construe this as a method of how you should treat your own portfolio.
I will be back to post after I record the Market Cast.
Reader Comments (3)
great post. thank you for answering my questions. I was planning on picking up some OTM S&P puts as a hedge, and after reading your post, i wish i would have done it today.
that was some great insight into what you do. much appreciated.
thanks for throwing insight about different trading approach to be used based on one's situation in this week's PRICE PATTERN's class.
I've a programming job and i've kept my trading simple with calls and puts. Therefore, you're insight was a confirmation.
Appreciate all you're help!
Have a great weekend!
Meena
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