This post was published last week on ZYX Buy Change Alert in response to an earlier post on partial hedging because of increased risks in the markets ahead of debt ceiling, spending cuts, and increasing dissension in the Federal Reserve.
We have received a large number of questions on hedging. Here are the answers.
I do not want to hedge, what else can I do?
The simplest way is to raise some cash. It is as simple as understanding that unrealized profits can quickly disappear.
The simple practice of slowly taking some money off the table when the market is high and reinvesting it back when the market is low can make a dramatic difference in your profits over a period of time.
What is the best time to hedge?
The best time to hedge is when the hedges are cheap and there are significant risks ahead; this is the case now.
What are the best instruments to use for hedging?
It varies widely based on market conditions and the pricing of hedges. There are instruments that may be appropriate for hedging at one time and may be the wrong instruments at another time.
Right now the best way to hedge is to use a combination of a very, very small quantity of VXX, a very small quantity of VXZ, a ladder of debit put spreads on S&P 500, a ladder of credit call spreads on S&P 500, and some covered call writing on existing positions.
How can I learn more about hedging?
Should hedging be customized?
Definitely, yes. No one size fits all. A hedging program should be customized based on the portfolio and the objectives.
Can you help me with a custom hedging program?
Yes. Numerous subscribers routinely take advantage of our consulting services to develop a custom hedging program. Those who are interested may email us the size of their portfolios, objectives, and preferences. The cost depends on the complexity of the hedging program.
Do I need to hedge very long-term positions?
If you are comfortable with the fundamental thesis behind your very long-term positions and also have enough cash to take advantage of any market dips, very long-term positions need not be hedged.