I’ve been toying with the idea of taking a small portion of my portfolio (maybe 5-10% max) and buying puts on stocks that seem to be overvalued. I’m not terribly worried about the bear market that they’ve been predicting for years, but this would be a small way to hedge against such an occurrence, whenever it were to happen. And if the stocks are highly overvalued, it might not even take a market decline to be profitable
I understand the risks with options and would only invest any funds that I am comfortable losing. I definitely am not looking to outright short any stocks…that whole unlimited downside is definitely not for me! Does anyone else use this strategy with any success? If you’ve considered and decided against it, what was your reasoning? Are there any stocks that jump out to anyone as terribly priced and ripe for a price drop? Thanks,
Tim
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Does anyone else use this strategy with any success?
Back when Apple was “going to a thousand!” – before its big dip – I hedged it using put ratio spreads. And that worked out when the stock fell, and I was mostly protected, but really I should have just sold the stock and moved on instead of hedging it. It was the one and only time I’ve ever hedged a specific company (MF Pro uses broader market hedges, and I’ve participated in some of those over the years). At this point, if I felt so uncomfortable with a company that I wanted to hedge it, I’d just sell it and move that capital to something I had a lot more confidence in. But that’s just me.
Neil
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I probably didn’t word myself clearly - I didn’t mean to hedge a position I already hold. I meant to hedge my portfolio in case of a bear market (with the potential for some gains even in a bull market). I’m contemplating using this strategy to buy puts on stocks that I don’t even want to own because they are not good stocks but are valued highly for one reason or another. I’m with you that if you feel uncomfortable with a position, just to get rid of it rather than hedging that particular position. I hope that clears it up a bit.
Tim
Hi Tim,
I have never tried this, but I’m curious about it. What stocks would you consider for this strategy?
The tricky thing with options is getting the timing right, of course.
Karen
Karen,
I haven’t done a whole lot of looking yet for current candidates. First I wanted to check to see if this was a strategy that could be used with moderate success based on others’ experiences. The idea occurred when I was reading through some different posts on the board and Saul mentioned the warnings he gave on the XONE and WPRT boards. Both of those stocks completely tanked not long after, and any puts would have been very valuable to own. I’m just not sure if this is something that would be easy to replicate or not. Plus, with a maximum upside of strike price minus premium (and ‘hoping’ the company goes bankrupt), it’s less potential upside than buying a stock or a call. I dunno, I feel like I’m taking myself out of the strategy except in extreme circumstances.
I’m going to try to see if I can find any targets in the next week or two, and if I see anything that I find interesting, I’ll post it on here.
Tim
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Hi Tim,
First I wanted to check to see if this was a strategy that could be used with moderate success based on others’ experiences.
MF Pro uses this strategy, setting up broad market hedges and specific shorts, though I think it’s very important to note that they never short just on valuation: they have a long-term short thesis based on issues with the company in question. They also make use a basket of shorts, with each one being a small position. Honestly, if you’re serious about trying this, I’d highly recommend signing up for Pro – Jeff Fisher’s style is very different from Saul’s, but he’s excellent.
Neil
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Neil,
Thanks, I’ll definitely look into that! That sounds a a lot like what I was envisioning!
Tim