Hedging is hard. It might even be financially dumb.
The last few weeks I have put on some hedges using $SPY Puts. Considering I wrote a post on January 5th called ‘Dow 50,000, VIX 1‘, I must be insane.
I can point exactly to the posts that got me thinking about hedges (here and here), but now that they are mostly worthless, like most other hedges I have ever put on, I am mad at myself once again. Go read those posts, they are fantastic, just my interpretation of them is wrong.
In 2008, I used to get short a lot. Not as hedges, but because the market went down like clockwork. I would wake up, read Joe @upsidetrader, and fire away with his ideas. It really was shooting fish in a barrel. It was to date, once in a lifetime.
Once March 2009 came, and the ‘inconceivable rally‘ (called it so the last 3 years)began, the hedge has been out of my vocabulary.
On January 1, I laid out the stocks I owned in my fund and for clients. I talk about them on the streams as well. The only dog in the group has been $AAPL. The mess in $AAPL stock is not a shocker by any means, as it was already teetering on broken on January 1.
I have sold some $EBAY, $GOOG, $Z (all and wrongggg) and $INTU (all) along the way to today but it is the hedges that have me aggravated.
So what did I learn from this series of lost hedges:
I don’t like hedging. I like cash as a hedge. Losses are part of the business as is giving up partial gains.
Derek Hernquist has a FANTASTIC post up about market divergences. Read it. Print it. If you invest or trade, put it up on your wall in your office or keep it near. It will save you so much time and energy.
I love the markets, the mechanics and the intricacies of it, but you can get to close to it.
If you watch CNBC you lose yourself in ratio’s and nonsense. Josh coined ‘Price to Ego ratio‘ this week and he is dead on.
Hope this helps.
Great post, but one point … you never hedged to begin with. If you owned EBAY, GOOG, Z, AAPL, INTU in your portfolio and bought SPY puts as a hedge, then those puts are not considered a hedge. You’re using alpha to hedge against market beta, which is wrong. A hedge would be being long AAPL’s stock and short the December 600 calls (you also collect income this way). Sometimes it works, sometimes it leaves your portfolio looking like a mess when you use alpha to hedge your positions. But if you’re going to do it that way, don’t call it a hedge, call it a normal bearish position. Sidenote: is there something wrong with your comment section? Having a problem posting here.
your blog is fantastic. I guess I mean to say my timing is bad. i am a half glass full thinker and cash is my hedge
Lol all I wanted to tell you was that your SPY put isn’t a hedge, it’s a position. Didn’t know it would spawn all these haters, jeeze, people have no mercy.
Unrelated question: Wanted to ask why you guys were cutting ties with Twitter? You can plead the fifth if it’s an inappropriate question.
covered it in my blog post a few weeks back. We are not cutting ties, Twitter has made their api silly with rules that change all the time. We cant afford to not just invest in our product by itself. People using our platform (200 developers, 75 percent of messages with $), use us for stocktwits, not twitter. we do make it easy to post through us with plugins and even hootsuite.
I’m a big fan Howard, but I’m a tad confused on how you were hedging. Agree with the other comments, your hedges weren’t hedges.
Hi Catherine, I hear ya. I know what a hedge is, maybe the blog post is a bit dramatic. I just suck at timing the market. more so on tops. I think it is a hedge in a non perfect way. if you are long and buy index puts it is a hedge in some portion, even if its not directky correlated
Kind of sad that nobody knows what a hedge is now-a-days. Straight from Investopedia: http://www.investopedia.com/terms/h/hedge.asp#axzz2LBMVmoKg
Victoria…I know what a hedge is. I also know investopedia and definitions in the classical term are imperfect. as are any hedges.
Great post, but one point … you never hedged to begin with. If you owned EBAY, GOOG, Z, AAPL, INTU in your portfolio and bought SPY puts as a hedge, then those puts are not considered a hedge. You’re using alpha to hedge against market beta, which is wrong. A hedge would be being long AAPL’s stock and short the December 600 calls (you also collect income this way). Sometimes it works, sometimes it leaves your portfolio looking like a mess when you use alpha to hedge your positions. But if you’re going to do it that way, don’t call it a hedge, call it a normal bearish position.
Totally agree with you, Howard isn’t hedging. A lot of people make that mistake and they don’t learn from their losses.
i guess I should just say betting on market declines.
Um yaaa Howard, you aren’t hedging.
Hey V, I think you need to do a post on how to hedge.
I don’t get it, is Howard long the SPY? How is he hedged?
i am long stocks (mostky high beta) and bought some SPY outs…which are expiring worthless
Hedging isn’t just about buying a crap ton of puts, there’s other strats out there.
Puts are, have been, and will continue to be damn expensive.
eh f&*$ it will do it live
http://iwo.enterthemeeting.com/m/LRY5D5TI
No one said it was just that…
great idea.
agree on that.
thanks Howard, appreciate the good words coming from you. have never had much luck with hedging, never enough when you want it and too much when you don’t. as long as we consider cash a viable(and temporary) home it’s a strong enough weapon to have and much easier to exit!