Subject: Hedging, evolution of a tech portfolio
If this isn't thread bloat, it might instructive if I explain what it is that I am trying to achieve. I am 50, employed, wife, two kids. We have education trusts for the kids and life insurance trusts for myself and my wife. In other words I am looking to my portfolio to support us in retirement and am less concerned about growing an estate to take care of the kids. Since I am employed in a deteriorating industry, retirement at a relatively early age is not only looking more and more desirable but may be a necessity. Thus preservation of capital is becoming more important at the same time that I am looking for long term growth. I trade online with Fidelity (since 1993) and have not spoken to a retail broker for at least ten years. I seldom use margin except as I enter/exit positions. I have experience buying and selling puts/calls with modest success and have sold covered calls, again with some success. I have shorted junk stocks with mixed success.
I am looking for a way to hedge a portfolio of technology stocks, many are gorillas, kings or at least candidates for those designations. I am comfortable with the individual stocks but would like to hedge the portfolio against market risk on the assumption that in a correction or bear market even the best stocks will get pulled down.
Now to my current portfolio. Last July I bought small positions in QCOM and SEBL based on a screen for high growth, profitable companies. Last Fall I became convinced that companies involved with bandwidth and wireless infrastructure build out had the most promise.I began reading more about the technology and I also encountered this thread for the first time in 10/99. I bought into OCLI to take advantage of the discount to the acquisition price offered by JDSU. Once the discount disappeared I sold OCLI in 12/99 for tax reasons and bought JDSU directly, making it my largest holding. Along the way I bought GLW, OPTX (to be acquired by GLW), SDLI, NT. I read TRFM in January and added further to my portfolio at that time. In time I intend to migrate my holdings toward gorillas.
My current holdings, % of portfolio and % gains:
JDSU 23.6% 54%
QCOM 14.4% 31%
OPTX 8.2% 436%
SEBL 7.4% 230%
SDLI 6.1% 223%
CSCO 5.9% 43%
NT 3.6% 113%
COMS 3.2% 35%
CREE 2.7% -8.2%
GMST 2.5% 29%
IMPT 2.4% -17%
NTAP 2.4% 60%
EXDS 2.0% 21%
GLW 1.9% 95%
BRCD 1.7% 14%
BRCM 1.2% 6%
WIND 0.2% -32%
Obviously I have a substantial exposure to technology (I am not having a fun day today). The balance of my holdings are in technology and energy mutual funds. The holdings are mostly in a taxable account but some are in IRA accounts. My profit on my wireless/fiber/tech holdings as of Friday's close is about 60%, all short term holdings. Selling now would result in a six figure tax bill.
I am aware of several ways to hedge. Some that limit upside potential significantly are: 1)selling covered calls and 2)shorting against the box. 3)Buying a gorilla and shorting a prince is an interesting concept that I haven't seen explored much.
4)Buying puts on each of my holdings avoids the limit on upside potential.
Given that I hold in some accounts only 100 shares of one of the above stocks all of the above represent fairly expensive, high maintenance solutions in my opinion.
I do not know anything about 5)using futures to hedge.
I am left with looking at buying puts on an index. There being no G&K index I have been looking at the CSFB Technology Index (CTN), the Morgan Stanley High Technology 35 Index (MSH), the Computer Technology Index (XCI), or the NASDAQ 100 (QQQ) as possible proxies for my portfolio. Only QQQ appears to have a sufficient volume in options. Only a minority of the stocks in each index mentioned would qualify as a gorilla or king. Therefore, I would imagine the indices may rise slower than G&Ks and fall faster, though I have no proof of this.
Sector indices:
CSFB Technology Index (CTN)
options.nasdaq-amex.com
Morgan Stanley High Technology 35 Index (MSH)
options.nasdaq-amex.com
Computer Technology Index (XCI)
options.nasdaq-amex.com
For some reason I haven't yet found a link that lists the components of the NASDAQ 100.
Suggestions or comments? |
