Does anyone here hedge or even consider hedging? Putting 2-3% of your portfolio in a 3x bear ETF or something of the sort? In good times, seems you would hardly notice the loss, and in bad, well, when it gets bad enough you could sell that sucker and buy some stuff on the cheap. I guess you have the same market timing problem as ever…but with less risk, right?
My hedging strategy is to keep about 15% of my portfolio in cash. When the market declines, I can quickly put that cash to work and wait for a recovery.
Yes, with various different methods. Be careful with 3x ETFs. They have a time decay component where some of the value erodes over time if the underlying instrument doesn’t move at all. They are not meant to be held as a longer term hedge, but as a shorter term trade in and out of during a time where you feel the need to hedge.
Index puts or put spreads can also be a good option, spreads cost less as volatility is high now, but also limit how much you will make off the hedge.
The volatility products VXX or UVXY can also be used to hedge as they go up when volatility spikes… but they have the same decay factor so you will lose if you hold them for extended periods.
For individual stocks, collars made of a put spread and covered call can work and are usually cheap, but you limit your upside from the stock as well.
And of course there is always cash. Over hedging basically equates to taking twice the risk to get half the return, but smart hedging at difficult points can help stabilize your portfolio or at the very least help you sleep better at night.
Trying to not post too much as it’s off topic form what the board usually likes to discuss, but hopefully this helps with ideas you can research more.
When I opened my ‘play’ brokerage account (which has since become far more than just ‘play money’), I put about 10% into an S&P futures index fund, PSPAX. It violated my low-fee rules since there was a 3% load up front, but it has allowed me to trade in between PSPAX and its partner ‘short’ fund, PSSAX. I’ve done that a few times over the last few years when the market clearly turned one way or the other.
This also violates the “timing the market” rule pretty clearly, and I don’t pretend to have prognosticating powers or guarantee that I got it exactly right.
It also hasn’t turned out to be a super-winner (I haven’t made money) – BUT it has saved me from greater losses twice (August and again recently). Sometimes, losing less than the other guy is the winning move…
I imagine some of you will :facepalm: at this strategy, but it allows for greater simplicity in my situation. Admittedly, cash is king when opportunities come about.
Don’t do what I do just because… but I figured I’d respond.
As a swing trader, I do this for a living via the Tetter Totter Principle.
Making money is boring.
eg…FAZ / FAS basically you shall be in one stock or the other at all tymes as they crisscross per the 13 ema and the 50 ema for some postive cash flow. You can careless what the market is doing.
I have stockcharts.com’s scanning tools to monitor them at all times. Werk smarter, not harder.
http://stockcharts.com/h-sc/ui?s=FAS&p=D&yr=0&mn… sell December 15th. wait then…
http://stockcharts.com/h-sc/ui?s=FAZ&p=D&yr=0&mn… bought on or about January 5th. …still climbing.
Have 15 pairs of the 3x
Have 12 pairs or more of the 2x
Is that what you were saying here? http://discussion.fool.com/arindam-i-can-but-cant-short-stocks-i…
I must admit I question my literacy when reading that.
That’s link is hilarious!