Hedging

L

LetsTrade

I tried something new (for me) today that worked out really well.

I was long two stocks as the naz headed into resistance and started to turn down. My stocks turned with it (one of them has a beta of close to 3, so it really turned!). I shorted the QQQ and rode it all the way down to support were I covered. This allowed me to stay in my positions without getting stopped out.

Anyone else use the QQQ as a way to hedge their positions? What are your strategies?
 
That's a pretty neat strategy. A simple strategy that sounds really effective, the best kind. Did you use a beta ratio to balance the short QQQ against the long positions? Every once in a while someone comes up with something interesting on this board.
 
letstrade-
yeah, i use that strategy often...it's a great way to reduce vol...very similar to hedging with futures
one thing is to make sure the stock you're in has decent correlation with qqq's ...one way to check that is on: www.market-topology.com
 
I use RealTick.

Regarding the Beta, I used that to estimate how many shares of QQQ to short to make sure I could stay long during the fall without losing money. The high-beta stock didn't show any strength when the Naz started to swing up, though, so I sold it. I was also long ADPT and using this strategy allowed me to keep it through the wiggles (it showed strength during the entire decline and really took off after).

I guess another way of hedging is by using options, but I don't know how to buy/sell options. Something to look into. Maybe the trick would be to buy a QQQ put when you sense resistance. Can options be traded intra-day like that?

Regarding Market Topology, interesting looking site but I haven't quite figured out what its about yet. They also say they've removed indices due to too much demand.
 
Curious, if the sole purpose of shorting the QQQ is to hedge the loss in another position (presumably a short term trade) , why not just sell the other position and buy it back lower?
 
Good question! Let me get back to you on that one...

Just kidding. :-)

It was pretty clear to me the Naz was going to head down at the time. What wasn't clear to me is how far my stocks would follow. These were stocks that had already been through significant declines and had formed reversal patterns. They might have declined just enough to stop me out of my positions but then held support while the rest of the market tanked. I also didn't have enough capital to sell both and then buy both back (under 25k trading account - limited to cash value of account for total transaction value).

Again, this was an experiment for me. I'm not a hedging guru (unless you want to pay me $800 - I'll narate my play on video for you! lol
 
Good answers from dufferdon and Letstrade.

Actually, it's many times easier to gauge the movement of the market than an individual stock, where a single large buyer/seller may control the price. In that case the QQQ hedge makes perfect sense. The only way to get burned is if your stock tanks, and your hedge goes the wrong way as well.

1000 to 1. :p
 
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