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Strategies & Market Trends : Portfolio Protection + Money Management for the Long Term
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To: BDR who wrote (2)4/8/2000 1:51:00 PM
From: BDR  Read Replies (1) of 57
 
How might you hedge? Here are some approaches I am aware of and my reactions to each.

1)Sell some or all of a position and sit on cash. Implies an ability to time the market getting out and getting back in that has escaped me. Costs: opportunity cost, pay taxes now instead of later.

2)Selling covered calls. Generates income, but one is giving up significant appreciation and control in return for downside protection that is only equal to the premium. Due to "American style" exercise, one may get called out anytime the option is in-the-money.

3)Shorting against the box. Again the timing required escapes me. Margin intensive.

4)Buying a strong stock in a sector and shorting a weak one in the same sector. Interesting concept that I haven't seen explored much.

5)Buying puts on each holding. Avoids the limit on upside potential of calls. Downside protection is good. Can be expensive. High maintenance to keep track of multiple positions.

6)Using futures to hedge. I am largely ignorant of this tactic but I am reading Chap. 32 of McMillan and I am beginning to get a glimmer of understanding.

7)Buy puts on an index that behaves in a manner approximating one's portfolio. Can be difficult to match? Liquidity? Simpler than managing puts on each stock.

8)Diversify. In my case that would mean moving out of technology for a mix of cash, bonds, "old economy" stocks, etc.

I would love to hear other people's experience and understanding of the above approaches or others that I have not mentioned. The costs of the different approaches may be more clear if we work through examples of different methods.
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