So I bought SPY awhile back at 171. It's now at 188 so I made a little gain. I guess the plan is to buy dips from here on.

Looking at the chart, I'm wishing I bought it back in 09. That's neither here nor there but I do worry about getting my paper gains decimated five times over in the case of another crash.

What if I had bought back in 06 or 07? Did those people just ride it out for 5-6 years until SPY gets back to its previous levels? Does one sell at the first sign of a crash?

So I thought about doing a little hedging. After doing a little research, I found a couple of funds that I can do this with: the Rydex S&P 500 Inverse Fund (RYURX), the ProShares Short S&P 500 (NYSEArcaH) and ProShares UltraShort S&P 500 (SDS:NYSE). There's also the VIX and its variants such as the ProShares VIX Short-Term Futures ETF (VIXY) and iPath S&P 500 VIX Short-Term Futures ETN (VXX).

These are all basically shorts on the S&P and the market in general. I've heard of John Paulson shorting the market by buying CDSs. I was wondering if this can also be accomplished (at a smaller scale perhaps) by using the above instruments.

I'm guessing that timing may be the hard part or recognizing that the drop is a full out crash and not just a correction, where one would be buying the dip instead?

If so, do I dump my SPY when a crash is confirmed then immediately buy into any of the ticker symbols above?

Would love to hear from any of the experienced traders and finance whizzes on the form.

Cheers

There are many ways to hedge, here are a few :

1) Exchange Traded Funds you mentioned, buy short S&P (SH), or double short (SDS)
2) options, buy puts on the SPY
3) futures, sell S&P index futures

I would say option 3 is the best because it does not tie up much capital, and the costs for getting in and out of your hedge are tiny.

I myself do not hedge at all. Because I am a long term investor, and the market goes up over the years, over the long term hedging will cost you, unless you are a great market timer.

The only guys I know that have had consistent success at market timing have spent at least 5 years studying it and have built their own buy/sell indicators.

I am happy to ride out the inevitable corrections along the way.

If you are investing long term I would say do not bother to hedge, and like you said, buy SPY on the dips.

If you think the market is currently overvalued (a good case can be made for that these days), then refrain from adding, and build your cash position.

Quote: (03-08-2014 07:43 PM)Steve9 Wrote:  

There are many ways to hedge, here are a few :

1) Exchange Traded Funds, buy short S&P (SH), or double short (SDS)
2) options, buy puts on the SPY
3) futures, sell S&P index futures

I would say option 3 is the best because it does not tie up much capital, and the costs for getting in and out of your hedge are tiny.

I myself do not hedge at all. Because I am a long term investor, and the market goes up over the years, over the long term hedging will cost you, unless you are a great market timer.

The only guys I know that have had consistent success at market timing have spent at least 5 years studying it and are expert at math.

I am happy to ride out the inevitable corrections along the way.

If you are investing long term I would say do not bother to hedge, and like you said, buy SPY on the dips.

When was the last time you " hedged " selling S&P futures ?

Have you run the math on how much capital you would tie up if you sold S&P futures ?

My guess is no

DTF,

what you are asking is not easy to answer. your risk profile and risk tolerance needs to be known. ETF and ETN all have their pros and cons.

i think a little knowledge is more dangerous than none.

Here is a list of VIX short ETFs/ETNs against the market (in my reply to reaper23.)

On the issue of hedging in general, i posted this little synopsis in 2013... i am just going to repost it below:

Quote: (09-26-2013 09:49 AM)Nemencine Wrote:  

....There are many ways to hedge. ....You can hedge with commodity futures, options, stocks, bonds, forex, etc.

The examples i have given below assumes you are doing things the right way.

Let me start with COMMODITY FUTURES:

Let us say that you are farmer that raise and sell cows. You are a cattle farmer. You anticipated that this year you will have to sell your cows for considerably less than their worth due to fear of mad cow disease.... How do you hedge against such a potential loss? One way is to go to the CBOT and and sell short cattle futures. If your fear is warranted, the loss you will experience from your cattle selling for less their worth will be upset by the gains you made selling short cattle futures on the CBOT. If your fear is unwarranted, then the gain you make from the selling your cattle will more than upset the loss you experience from selling cattle futures short.

Airlines do this too. Due to global terrorism and middle eastern unrest which results in spike/increase in the price of jetfuel/kerosene. Aeroplanes burn through jetfuel a lot. This means, you will be put in the position of losing airline customers if you increase your traveling prices due to increase cost of jetfuel or kerosene due to middleeastern unrest. So, how do you keep down your cost and beat the competition with an attractive air travel price while experiencing increase jetfuel price? You can go LONG crude oil futures...as the middleeastern unrest raise crude oil prices, the airlines make money from long crude oil, thereby offsetting the rising cost of jetfuel they need to run their planes.


STOCKS/INDEXES:
For stocks, let us assume that Tesla is strong, General Motors sucks. They are both in the automotive industry space. You can go long Tesla Motors(ticker: TSLA) shares and hedge your bet with short GM or F. The principle is you find the strongest in the industry to go long, and the weakest to go short; all at the same time. That is a simple long/short strategy. So, if TSLA goes up and GM goes down = you make money since you are long TSLA and short GM at the same time; However, if TSLA goes up and GM goes up = the money you are losing in GM short is offset by the money you are making in TSLA = it balances out....; If TSLA goes down and GM goes down = the money you lose in TSLA is offset by the money you make shorting GM = it cancels out. Of course, all these assume you do select the right stocks at the right time, etc.

BONDS:
You noticed that Bernanke just started his QE program.... so you want to hedge against devaluation/inflation while profiting from the QE madness. One way is to go long the housing market ETFs(e.g XHB) or housing market stocks(e.g. APOG) and short 10 year bond as an hedge due to bernanke's QE... Or you can go long TIPS(inflation adjusted treasury bonds) as a hedge against inflation while shorting the US dollar through the EURUSD because of bernanke's QE madness. long EURUSD = long EUR, short USD. or you can simply go long the XAU/USD because Long XAU/USD = long XAU and short USD simultaneously. XAU = gold, USD = us dollar. Since gold is an hedge against inflation.

FOREX/CURRENCY:
Let us say that you own a mega corporation that does business all over the world.... you make toothpaste in Canada and sell it in the UK. you are making good money because(a) your toothpaste is selling, your raw material acquisition costs are cheaper, you are the perfect example of six sigma implementation, etcetera, etcetera ( b) and also, because canadian currency, the canadian dollar(CAD), is cheap compared to the British pound(GBP). Even though you are making 1 toothpaste for 1 CAD and selling it for 1 GBP... however, since the rate of exchange between CAD and GBP is 1:2... that is, 1 GBP = 2 CADs... when you convert your profit of 1 GBP to CAD...you get 2 CADs = you've doubled your money!. (this is the reason why currency devaluation is good for exporters)
Now, however, things are about to change, they are electing a new PM in the UK who wants the MPC to aggressively expand their asset purchase facility through the roof. That means, the value of GBP will drop due to devaluation...so, a megacorporation can protect their bottomline by hedging through selling short the GBP/CAD currency(shorting GBP/CAD = long CAD, short GBP.). Basically using the currency market to hedge against the downside. The profit made from short GBP/CAD will then offset the shrinking profit margin from the tightening exchange rate differential. Voila!

OPTIONS:
There are a hundred different ways to use options. I guess the simplest one is to say that you are long AAPL shares, then you take PUT options on AAPL.

----
Of course, you can mismatch all these different methods of hedging together in a thousand different ways as you see fit/comfortable with. Hopefully, you find this to be helpful.

regards,

--Nemencine

Quote: (03-08-2014 06:47 PM)dtf Wrote:  

So I bought SPY awhile back at 171. It's now at 188 so I made a little gain. I guess the plan is to buy dips from here on.

Looking at the chart, I'm wishing I bought it back in 09. That's neither here nor there but I do worry about getting my paper gains decimated five times over in the case of another crash.

What if I had bought back in 06 or 07? Did those people just ride it out for 5-6 years until SPY gets back to its previous levels? Does one sell at the first sign of a crash?

So I thought about doing a little hedging. After doing a little research, I found a couple of funds that I can do this with: the Rydex S&P 500 Inverse Fund (RYURX), the ProShares Short S&P 500 (NYSEArcaH) and ProShares UltraShort S&P 500 (SDS:NYSE). There's also the VIX and its variants such as the ProShares VIX Short-Term Futures ETF (VIXY) and iPath S&P 500 VIX Short-Term Futures ETN (VXX).

These are all basically shorts on the S&P and the market in general. I've heard of John Paulson shorting the market by buying CDSs. I was wondering if this can also be accomplished (at a smaller scale perhaps) by using the above instruments.

I'm guessing that timing may be the hard part or recognizing that the drop is a full out crash and not just a correction, where one would be buying the dip instead?

If so, do I dump my SPY when a crash is confirmed then immediately buy into any of the ticker symbols above?



Would love to hear from any of the experienced traders and finance whizzes on the form.

Cheers

Imho, hedging doesn't make sense for the average retail "investor" as it will eat up a large amount of your profits or possibly even more. Setting a stop level in a reasonable distance away from the market is much better.


Furthermore, what makes you think a crash can ever be confirmed ? When the market has gone down hard and the average Joe Shmoe realizes the market has crashed, that's when the smart money get's in and buys.

dtf,

Sell SPY and spend all your money because you're going to lose most, if not all of it.
Either that or learn to invest.

Thank you for the responses & advice. After reading your responses, I think that hedging is not what I'm looking for. Rather, it's knowing whether a significant down day followed by other down days is a signal of a correction or the makings of a full blown market crash.

I point this out because I would buy on a correction but would have the big temptation to sell/dump at the sign of a market crash. I don't want to suffer thru like the people who had SPY in '06 & '07 then saw their positions get cut 60% in '08 & '09 and then have to wait 5-6 years to get back to even.

Say the S&P drops 30 points tomorrow. Then it drops another 50 points the next day. Then the next day it still keeps dropping right after open. So I ask of the experience traders, market insiders & finance whizzes - what would you do?

Maybe I just keep buying as it keeps dropping? Hoping it'll reach bottom eventually?

Quote: (03-10-2014 02:25 AM)dtf Wrote:  

Thank you for the responses & advice. After reading your responses, I think that hedging is not what I'm looking for. Rather, it's knowing whether a significant down day followed by other down days is a signal of a correction or the makings of a full blown market crash.

I point this out because I would buy on a correction but would have the big temptation to sell/dump at the sign of a market crash. I don't want to suffer thru like the people who had SPY in '06 & '07 then saw their positions get cut 60% in '08 & '09 and then have to wait 5-6 years to get back to even.

Say the S&P drops 30 points tomorrow. Then it drops another 50 points the next day. Then the next day it still keeps dropping right after open. So I ask of the experience traders, market insiders & finance whizzes - what would you do?

Maybe I just keep buying as it keeps dropping? Hoping it'll reach bottom eventually?

Look up dollar cost averaging.

Just reduce your cost basis man. Personally, I would be selling calls against my position if I were you (1 call/ 100 shares) and continue buying dips until you feel things are just to overvalued.

There are inverse ETF's if you are worried about the downside. SDOW, FAZ, TZA to name a few.

Selling futures to hedge?! You must have a huge position.

Quote: (03-10-2014 02:25 AM)dtf Wrote:  

I point this out because I would buy on a correction but would have the big temptation to sell/dump at the sign of a market crash. I don't want to suffer thru like the people who had SPY in '06 & '07 then saw their positions get cut 60% in '08 & '09 and then have to wait 5-6 years to get back to even.

dtf, Big market selloffs (say at least 20%) usually occur in association with recessions. IMHO, the US is not near a recession now.