Posts Tagged ‘hedge’
The Best Way to Invest in Currency
Written by Jared A Levy
Last weekend after attending our annual financial summit in Las Vegas I realized a couple of things.
- Just about everyone Read more
Smart Investing Daily – The Secrets to “Hedging” Like a Professional
Tuesday, 26 October 2010
Remember the old adage that it is much easier and cheaper to buy insurance when the weather is good as opposed to when a tornado is coming down your street?
Here’s a lesson I learned quickly in my early days as a trader:
Professionals almost always have a “hedge” or some form of protection just in case things go wrong. A hedge could be as simple as diversification or an option strategy like a covered call. Hedges can also be done with hard assets like real estate or numismatic coins.
“Hedge” funds are very actively managed and invest in all sorts of assets to try to provide exceptional returns for their investors and minimize volatility when things go south in the markets.
When I was a trader on the floor of the stock exchange, I almost NEVER took on a position without having a full or partial hedge to protect it.
But hedging isn’t just a tool for the pros. You could (and should!) be implementing this technique too, especially now. Here’s what you need to know…
An Easy Example
If I were long 1,000 shares of Apple and thought the market was looking a bit overbought, I might sell 300 shares of the SPY to lower my trading account’s overall “volatility.” In other words, if I am still bullish on Apple and don’t want to sell my Apple position, maybe for tax reasons, my short SPY position helps to buffer my account when the market sells off. I will still make money when it goes up.
Here is what a hedge looks like:
Long Apple Stock Alone:
Apple is down $1 — my account would be down $1,000 (1,000 shares)
Net result is a $1,000 loss on that day
Long Apple Stock With Short SPY Hedge:
Smart Investing Daily – Protection
Two Ways to Protect Your Retirement Portfolio In a Down Market
Wednesday, September 01, 2010
One of the oldest methods of protecting your retirement money is by spreading risk out among different stocks and sectors. While this may be a partially effective way of mitigating the risk of a major drawdown in your account, it does NOT ensure success. In fact, in a broad market sell-off, you may see several sectors moving lower at the same time, similar to what we’ve experienced over the past couple months.
That begs the question… what to do? The answer is simple…
Sell When Things Are Good or Scale Out of a Position
As a trader, controlling your greed, setting goals and being proactive can not only help preserve your regular capital, but your mental capital as well. Here’s what I mean. Let’s assume you bought the S&P 500 ETF (SPY:NYSE) at $107 on June 20, 2010; one week later, it is trading at $113 and the charts are looking shaky, not to mention the broad market is not very stable. At that moment, you could take some profits (you just made an annualized return of over 220%) by selling some or all of your shares. You could also sell covered calls against your stock. (Covered calls offer some protection and lower your cost basis.)
In either instance, not only would you have a winning trade that would increase the size of your account, but you would also have a sense of accomplishment and feel more confident when entering your next trade. Not to mention, you would have the capital freed up to do so. This proactive approach to trading is a necessity in today’s uncertain financial markets.