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QUICK & DIRTY HEDGE STRATEGY
(even for restrictive mutual fund or IRA accounts...See below).
A shifting stock market has
given us some tentative buy signals for the adventurous, but they must be
traded with caution. Up until now there has been no effective way for the
individual to put on the same type of protective positions as the large
hedge funds because the cost of insurance was too high. Typically they
use 10%-12% margin to protect themselves during times of indecision.
With the advent of new trading
vehicles we now have the opportunity to protect our positions for
somewhere around 3%-8% but this is not a permanent cost, but rather
collateral and you will get the majority of that back. Typically the
maximum cost for hedging your bets should fall in the range of about 1.2%
of your total portfolio and if the worst occurs and the market melts down
you will end up making money without giving up your long term positions..
The way it works is that you
will put on protective hedges as the markets begin to turn up but risk
remains high. You can also use this strategy at any time that you feel
that you are at the bottom of a trading range which MAY bounce but you
don't want to take the risk of a catastrophic meltdown.
Now, how do we construct the hedge? Normally this would be a time
consuming and difficult and complicated effort.
As part of our online signal services we have a full featured Structured
Hedge Generator which allows you to construct both long and short hedges
on a sector by sector basis, but for most folks they want to hedge long
broad market positions at times of risk and for that reason we have come
up with a "Daily Hedge" that is published nightly for Pitbull Investor
Subscribers.
Basically you look at your equity positions and for each $10,000 in your
account you buy the appropriate amount of index options (SP500) to
provide the downside protection for your account. Usually this amounts to
anywhere from 2 to 4 contracts. If you are trading options only, then we
also indicate the number of contracts needed to cover those positions
which have increased leverage. Using this simple format you can hedge any
mix of equities and options within your trading account.
We have now created an
offsetting hedge with an average of about 5% of our total capital as
collateral.
That does not mean that we are going to lose 5% if we see all of our
investments move in the direction we hope for, because at some point we
will take our hedges off, when conditions merit and we will sell the
calls back and get a return of premium and remaining value. Typically the
actual cost of protection if all of our major trends prove correct is
only about 1.2% and if we are making money that gets lost in the noise
for an opportunity to get in early or stay in a trade during dangerous
times.
After that trial period it will be available to existing Pitbull Investor
customers for the duration of your subscriptions and to Mentoring Students
or Lifetime Members. If you renew your RoundTable before the end of this
month, the added time will be added to your subscription and you will have
access until that expires.
At the end of this month this will become a separate paid service.
Enjoy and let me have your feedback.
Henry
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