Let’s Go Long – November 15, 2011

[Pierre Brodeur]

Hi Nickola,

May I ask why you hedge trades ? I don't see the benifit of hedging for individual traders like us. My understanding of hedging is it's something funds do because they can't get in or out of positions as easy as we do. I find that if a trade is position sized objectivly then the trade is as relaxing as possible without the need for adding complexity by hedging.

Hedging is really a function of your trading style and of what the market offers you at a specific point in time. I am a swing trader with a trading/investment horizon of several weeks or more. Given that I am generally bullish ( which is not the prevalent "opinion" in this forum currently), from time to time, as a swing trader, I need to hedge my income producing and more speculative long positions with double beta inverse positions in order to preserve the hard earned profits from these long positions on downswings. Generally if and when I calculate the right hedge proportion required to protect and enhance my portfolio I actually generate a nice excess profit on the downswing as well.

Pierre Brodeur

[nickola.pazderic]

Pierre,

Finely put. Thanks.

Regarding enteries, with IWM heading back toward DS1 (at least to the south of its DPP), TVIX is showing a possible opening about now:

[Rembert]

While not my intention I am actually hedged at the moment, long IWM with the robot, short SPY with another system.
Usually when there is such a conflicting situation, one system will get stopped out in short order while the other continues on.

@Pierre and Nickola : What you say makes sense. Great if you can make it work. I can say it's not for me tough.
It requires great skill and experience to time these short term hedges ... as well as intraday following.

[nickola.pazderic]

If there is one phrase that expresses the spur to active hedging it is this.

I've driven thousands of miles across the northwestern United States. My dad was a truck driver, long haul.



Deer and elk (and they can be taller than your SUV) really do stare stupidly into head lights. I've had friends who have hit ungulates and totaled their vehicles. I stopped a couple yards short of a giant bull elk on Highway 200 near Roger's pass last summer.

As a trader, I've felt like the deer many times. As reckless as I might be, I have decided to protect and profit from the market, I must take active counter measures.

[Rembert]

Oh believe me, in my first few years of trading I've had many 'deer in headlight' moments. It's a horrible feeling. The moment I asked myself while in a trade : I didn't expect this ... what should I do now ? That's the moment I was lost. Now I prevent these situations from happening by employing rules for position sizing and exit management. Active hedging might be another way to go but like I said it doesn't suit me.

[nickola.pazderic]

With volatility over 30, options prices are rich. (I'd like Ernst to chime in here).

In any case, an easy hedge in these conditions is to sell premium against robotic holdings.

Using this calcuation:

[k/(S1-C)-1](100%) (please let me know if this equation is not accurately transcribed)

K=strike price
C=call price
S1= beginning stock price



I find that I can sell premium for 10% gains going into Friday!

[ernsttanaka]

With volatility over 30, options prices are rich. (I'd like Ernst to chime in here).

It is only rich if the Historic Volatility for the next 20 days (or so) is below an annualized 30% volatility.

IV is forward looking while HV is looking back in time.IV is the expected, while HV is the realized.

To find out if IV was correct you will need to slide the HV graph back (20 to 30 days)

check this for a read on how the vix is calculated. http://www.cboe.com/micro/vix/vixwhite.pdf