Ever hear of 'you get what you pay for' ?
Problem with hedging a leveraged book is you need puts that move big. Thus the use of BIDU and FXI. (I like GOOG options however since I believe the mkt tends to underprice volatility for the when it makes large moves. The lack of volatility between large moves keeps goog vols and long option premiums under control). The IV blowup yesterday alone was beautiful on the BIDU. Going long volatility pays. These puts were near term expiring and I even closed them above my entry point at a profit.
QQQQ or DIA puts don't perform, simply put. BIDU moved 20% yesterday. nasdaq and s&p took 2 months to move like that. IV blowup is also much less accentuated.
If the market crashes, I want puts on something that goes down 50% (ie Hang Seng a la 87 market crash), not 10%.
Thats the thought here. Its occured to me hedging does something crucial - it preserves cash in an adverse market. The idea that risk of carrying leverage can be almost entirely offset by hedges is certainly appealing and requires good management in itself. Encountering the rare day where a sharp reversal was net positive on a leveraged long account was certainly eye opening. With cash preserved, I can actually afford to take that next position. Thats more important than foregoing potential gains (and missing the BIDU trend, for example). Now I realize its especially necessary if leveraged w/ options positions or margined stock, since trend reversals threaten to entirely wipe out value of pre-existing long positions.
I personally don't have the fortitude to play momentum when the fundamentals don't seem in line with my thinking. I'd much rather play it when I see fundamentals intersect. Sure I'll forego gains, but I also won't get hurt when the momentum reverses.
Watching these big favorite momentum stocks right now is pretty silly. Analysts come out every day and upgrade/pump these stocks to no end, but these same stocks were ignored when they were much greater values. And the latest JP Morgan move on BIDU is the biggest tell. The same analyst that gave it the goofy $400 price target one week later comes out and deflates the bubble. How do the fundamentals change in one week? Amazing this guy even gets the credibility to move the markets.
That price action yesterday (and today) says one thing: this game is momentum, and everyone is in the same names ready to pile out just as quick as they piled in. At these levels, the the hands are definitely weak. I wouldn't fight the trend with primary positioning, definitely, but I wouldn't play it long term and get to delusioned about goog to $800 fantasies or BIDU to $500 the same.
Those momentum names recovered because we are still in the early stages of a bull that will probably go much further ... but there will be a day where the selling continues on a second day. Thats the day you let your hedges run. Yesterday I sold most of my hedges and kept all of my FXI on the table, though. I don't regret it, but I thought it was too early for the dumping to continue unless china was going to follow our lead. People are conditioned to buy the dips in a bull market, as I am.