Wednesday, 20 January 2016

HEDGING YOUR POSITIONS (holding buys and sells)

How are we all doing in this turbulent time for traders? I will be honest and say I am not making a lot of money (but I have been making some) and it's times like this that I can honestly say I am feeling frustrated, worried and confused about where the market would go from here. As I write this Wall st is looking down the barrell of 300 point drop and its still 7 hours until the markets open.

One thing that has saved me is the fact that I had positions hedged on both the up and down so that took much of the impact of the recent falls over the start of the year. One thing I can be sure of is that without those sell positions there is no doubt I would have run out of liquid funds in my account and subsequently been sold out of the market (akin to a margin call) 

Luckily I had a few sell positions .... (well not luckily, I keep them as a matter of principle) to offset any sudden drops in market and over the last 2 weeks it has come in very handy.

HERES AN EXAMPLE OF HOW THIS MIGHT WORK

Lets say you were following my strategy and you had 10 open positions going up, and you felt that the market was a little shaky.... or maybe you felt that the market was just "over bought" and was due for a correction you could take out some sell positions. lets say I took out 5 sell positions this would mean I have 10 going up and 5 going down. Lets say I go to bed at night (Australian time) and the market completely shits the bed and drops 200 points that means i loose $2000 worth of equity on the 10 x buy positions but I gain $1000 on the sell positions. So basically this halves the damage a drop like that can cause... Its a good little insurance plan for when these things happen .... I like to trade with at least a few sells positions offsetting my buy positions so that when a massive slide starts to happen (and lets face it... it seems to be happening every couple of months) i've got a little head start on it.

I can either close off the sell positions now and cash in my $1000 and hope the markets rebound maybe sell off 1 or 2 of those positions and wait till the market looks like its going to bounce back

The longer you've spent in the market the better your sense for these things will be but it does extend your trading range by a long way by hedging positions on both the ups and downs.

DISCLAMER:


If you take out short positions at the bottom of the market it may save save you temporarily but then you have to unwind those positions as the market retraces its losses. If the market drops well below the point where you decided to hedge with sell positions it's much easier but if the market drops to the point where you opened up your sell positions then bounces back this can be rather difficult and leave you with a whole bunch of legacy sell positions that can be expensive to unravel later.

HERE'S AN EXAMPLE OF HOW THIS MIGHT WORK

Lets say you have the market tanks and you take out 10 positions to go down and you get it at the bottom of the market and the market retraces 300 points in the next couple of days you are now carrying a loss of $3000 if you don't unwind those positions before they get out of control, and you either have to throw in more money or get yourself in a bind that you can't get out of,,, but I think it's still worth the risk because if you find yourself in that situation generally speaking you would have been margin called anyway. This won't always save you but it does give you a fighting chance.

Generally speaking if you are going to do this (and it has helped me a few times... and bit me on the butt a few times) be careful ..... it is better to start hedging the bets before you are about to be margin called so you can stagger these things out ... and then close off any sell positions you might need to sell on the way up once you experience this you'll know what I'm talking about...

No comments:

Post a Comment