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Thursday, March 28, 2024

k1 Project – Covering and Hedging II – Complications

"Hedging is, in part, an admission that you may not know everything – that you may in fact, be wrong about a few things and are willing to pay to insure against that possibility." – Phil

"Don’t forget to place a value on flexibility. A lot of times, I buy out my caller just so I have a clean slate. I may resell it later but having to execute a sell, then a buy on a big market move slows you down." – Phil, on Flexibility

(In the previous comment, I think Phil means it slows you down to buy back a call on a big market move. Sometimes he’s already on to the next thought while his fingers are still spooling out the typing buffer)

This section covers a number of issues that come up regularly regarding covering and hedging, but for a variety of reasons are more complicated than the basic covering and mattressing tactics. As you read, please keep in mind that just because it’s more complicated than the other tactics does not make it more successful or profitable.

Motivation

Phil about learning why to hedge

Once I lost $45,000 while flying from NY to Houston on a market dip but worse than the fact that I had arrogantly not hedged my positions was the foolish way I overreacted and tried to "win it back" once I got to Houston, far away from my regular trading desk and most of my notes. I quickly doubled my losses and had a very gut wrenching plane flight home, with my virtual portfolio in turmoil – left to the whims of the market. I often tell members that I don’t mind losing money as long as I learn something but that’s total BS when it costs you $90,000 to find out your positions aren’t as strong as you thought they were. The lesson I did learn from that trip was not how to hedge, that cost me many, many thousands more, but at least I learned that I SHOULD hedge – and now I do it well enough to teach it to others.

Reading List

Hedging Your Way to Fun and Profit – Once Upon a Mattress Play

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