Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18
How to Know If This Stock Market Rally Will Continue for Two More Months? - 14th Jan 18
Everything SMIGGLE from Pencil Cases to Water Bottles, Pens and Springs! - 14th Jan 18
Land Rover Discovery Sport Very Bad MPG Fuel Economy! Real Owner's Review - 14th Jan 18
Gold Miners’ Status Updated - 13th Jan 18
Gold And Silver – Review of Annual, Qrtly, Monthly, Weekly Charts. Reality v Sentiment - 13th Jan 18
Gold GLD ETF Update.. Bear Market Reversal Watch - 13th Jan 18
Stock Market Leadership In 2018 To Come From Oil & Gas - 13th Jan 18
Stock Market Primed for a Reversal - 13th Jan 18
Live Trading Webinar: Discover 3 High-Confidence Trade Set-Ups - 13th Jan 18
Optimum Entry Point for Gold and Silver Stocks - 12th Jan 18
Stock Selloffs Great for Gold - 12th Jan 18
These 3 Facts Show Gold Is Set to Surge in 2018 - 12th Jan 18
How China is Locking Up Critical Resources in the US’s Own Backyard - 12th Jan 18
Stock futures are struggling. May reverse Today - 12th Jan 18
Three Surprising Places You See Cryptocurrency - 12th Jan 18
Semi Seconductor Stocks Canary Still Chirping, But He’s Gonna Croak in 2018 - 12th Jan 18
Land Rover Discovery Sport Panoramic Sunroof Questions Answered - 12th Jan 18
Information About Trading With Alpari And Its Advantages - 12th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

How to Safely Hedge Your Stocks Portfolio in Uncertain Times

Portfolio / Learning to Invest Mar 08, 2013 - 03:08 PM GMT

By: Investment_U

Portfolio

David Eller writes: What a year 2013 has been. The S&P is up 6% and we’re 3% away from all-time highs. The Dow Jones broke through 14,000…

Can things get better from here? Can they even stay this good? Nobody knows where the markets will go, but there are ways to protect yourself and sleep easy at night.


Personally, I’m not a believer in short selling individual stocks. The deck is stacked against you. The Fed wants asset prices to increase, company management teams want stock prices to rise and sell-side investment analysts constantly prop up share prices of weak corporations. This is just too much to compete with when there is easier money to be made buying stock of good companies.

However, if you are concerned about protecting gains, short selling an index can be an effective way to lock in profits, without liquidating your portfolio. Why go to the trouble?

Let’s say you’re fully invested in The Oxford Club’s Oxford Trading Portfolio. This consists of 25 stocks in diverse industries. It could make sense to keep your positions on for tax purposes, to capture the dividends, or just because you think these stocks will outperform if the market sells off. How can you protect yourself?

Some methods are better than others, so we analyzed the five major pullbacks over the last three years to find the best ways to hedge. We also uncovered some useful takeaways that can help you protect your hard-won gains.

Shorting SPY isn’t an efficient hedge.

The first option that comes to mind is shorting the S&P 500 tracking stock, the SPY. It makes sense this would protect your downside on a one-for-one retreat in the S&P 500. But unfortunately, empirical evidence shows this isn’t the case.

According to the second table, the SPY only pulled back 88% of the decline. And in Table 1, it retraced a smaller percentage than the S&P in each of the five pullbacks. While it is possible to short the SPY to protect gains, it clearly isn’t efficient.

Buying VXX is like juggling chainsaws.

The most dangerous method may also be the most talked about. The financial press loves to discuss a fear gauge known as the VIX. If you time an investment in this security perfectly, you can see dramatic returns. During the market sell-off between April 2 and June 4 of 2012, the VXX returned 29% compared with a 9.6% drop in the S&P. It also increased by 3.8 times the pullback of the S&P 500 on average over the last five meaningful declines.

The returns are great… But in my opinion, investing in this security could be compared with juggling chainsaws. Your timing has to be perfect. If you had left the position on until June 20, the return would have dwindled to -5%, even though the S&P was still down -6%.

The VXX loses money every day in a normal market because of the way it rebalances. Each day, the VXX has to buy a certain percentage of VIX contracts, two months out, while selling that same percentage of contracts one month out. Because time is a component of option value, the longer-dated options usually cost more. This drives down the value of the fund as cheaper contracts are replaced with more expensive ones.

Buying SDS is expensive, but doesn’t require a margin account.

Inverse index ETFs such as SDS are another option – and you don’t need a margin account for this strategy. The SDS tries to mimic performance that is twice the inverse of the daily return of the S&P 500. If the S&P falls 2%, the SDS should rise 4%. We back-tested this security against the SPY and found it tracks the index closely.

The SDS is volatile, but it does what it claims to do. However, it can eat up a lot of your buying power. When you sell a stock short, you borrow the security from your broker and sell it to somebody else. Margin interest is not paid on the total value of the security. It is only paid on the dollar value the position moves against you. Imagine you sold short 100 SPY at a price of $150. If the position moves against you to $151, you would be paying margin interest on $100 instead of $15,100.

Shorting SSO provides both leverage and correlation with the S&P 500.

The SSO is the reverse of the SDS. It is a levered, long ETF that tracks the S&P 500 closely. On average, it fell 1.72 times the range of the S&P 500. If a person wanted to fully hedge a $100,000 portfolio, it could be done with $58,000 ($100,000 / 1.72 = $58,140). The investor would also only need to pay interest on the loss of the hedge, rather than the full amount.

If you have a diversified portfolio, you are naturally hedged against an upward drift in the market; shorting an index or buying an inverse ETF are ways to accomplish this goal. But remember, some methods are more volatile and require a margin account, so be sure to consider your personal situation and tolerance for risk when selecting a strategy.

Good Investing,

by David Eller,

Source: http://www.investmentu.com/2013/March/how-to-safely-hedge-your-portfolio-in-uncertain-times.html

http://www.investmentu.com

Copyright © 1999 - 2012 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules