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Mark Bern, CFA

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  • The Time To Hedge Is Now! December Update - Part I [View article]
    I believe that I mentioned that the results posted in this article were from mid-October. For the record, I believe it was actually October 15th. Yes, the gains that were accumulated to that point have vanished.

    The total cost of my hedge was equal to 1.6% of my portfolio. The hedge had covered only about 7.5% of my unrealized loss at the bottom in October. The strategy is not designed to protect the first 15% loss. I have made it clear earlier in the series that I am willing to accept up to 15% loss of my portfolio to keep the cost low. My fear is not being hedged when the market falls by more than 20%; as in the 57% drop from 2007 to March 2009. I was down but not by as much because I had partially hedged my portfolio. I have been burned twice, so I am hedging my portfolio completely at this point.

    The way this strategy is designed to work is that the insurance/hedge is supposed to protect us against losses greater than 15% and does not begin to fully kick in until about that level. If the market goes down by as much as 30% or more we should, in theory, be fully protected against most, if not all, of our unrealized losses. The idea is to make holding for the long term more palatable.

    When the market bottoms and begins to turn higher, we unwind our hedge positions and reinvest the proceeds, increasing our div income while keeping our portfolio value intact (or at least nearly so). There is not way to be perfectly precise using this strategy, but the cost of the hedge is minimal compared to more traditional methods, such as buying put options on the stock owned.

    I hope that helps to answer your questions and thank you for asking.
    Dec 8, 2014. 01:31 PM | Likes Like |Link to Comment
  • The Time To Hedge Is Now! December Update - Part I [View article]

    Yes, I did employ this strategy in 2007-2009, but I was only partially hedged during episode. I was a little off on the entry and exit, so I could have done better. I tried it the first time in 2000, but on a very limited basis. It helped both times but could have helped more if I had been willing to hedge more and had identified more candidates to use in those instances. I was never more than 50% hedged but was fortunate enough to have chosen decent candidates (included in this series). These experiences add up and we all learn a little more from each one. The problem is that the results will never be exactly the same for all the candidates in all instances. This is where we need to do more refinement as we gain experiences such as occurred in October.

    Thanks for the comment and interest.
    Dec 8, 2014. 01:09 PM | Likes Like |Link to Comment
  • The Time To Hedge Is Now! December Update - Part I [View article]
    Gedankonomist - I appreciate your constructive comment. I have already made the decision to eliminate both ETFC and JBL from future hedge strategy articles. Although, I do believe that ETFC will suffer in a strong downturn, the company's asset mix is different and it could weather a storm a little better this time. JBL did not crumble during October as other candidates did. I am eliminating at least two others, as well. Believe me, I do pay attention to such details. Thanks again for the comment.
    Dec 8, 2014. 01:13 AM | 1 Like Like |Link to Comment
  • The Time To Hedge Is Now! December Update - Part I [View article]
    True. But since I generally stick to buying stocks of companies I would like to own forever (unless something changes fundamentally that impairs the company's future prospects) we will naturally have different strategies.

    In the case of MU, assuming you want to continue to hold it long term, I would start by deciding how much downside you are willing to withstand. Then I'd buy put options at or above that level to protect yourself from losses greater than your risk tolerance. You know you will lose some, but can limit the loss. Again, look at the total cost per month of the options to determine the best value for your situation. Good luck!
    Dec 8, 2014. 01:08 AM | Likes Like |Link to Comment
  • The Time To Hedge Is Now! December Update - Part I [View article]
    I would roll the position but probably not until less than 3 months before expiration. The comments and responses to the first few articles in this series would probably answer your questions more thoroughly with one exception: the adjustment of strike price is likely but will vary significantly from one company to the next. It really depends upon whether the company has made significant improvements to its business model or not. If not, it will suffer more in a recessionary climate than investors expect.
    Dec 8, 2014. 01:03 AM | Likes Like |Link to Comment
  • The Time To Hedge Is Now! December Update - Part I [View article]
    Cambridge Investor,

    I should also have mentioned that, in calculating the cost per month for each option position, you should include a weighting factor for the number of contracts needed to provide the hedge you require of the positions. I'll provide examples in Part II. But, in short, if you only need 3 contracts of a July 2015 put option instead of 4 contracts of a January 2016 to provide the same amount of potential gain you are targeting the monthly cost may be less even if the two premiums are nearly the same. You'll see how it works in Part II. At least I hope you will. LOL!
    Dec 7, 2014. 09:13 PM | 1 Like Like |Link to Comment
  • The Time To Hedge Is Now! December Update - Part I [View article]
    Section8 and Cubanezul,

    Thanks for the supportive comments! I hope you can find the right balance of risk for your portfolios. This is strictly a hedging strategy so don't use this as a guide to potential gains solely from options. Good luck!
    Dec 7, 2014. 06:36 PM | Likes Like |Link to Comment
  • The Time To Hedge Is Now! December Update - Part I [View article]
    Cambridge Investor,

    Thanks for the questions.

    "Firstly, why not just hedge your portfolio with puts on your long positions rather than on a basket of stocks you feel will perform the worst in a market crash?"

    The simply answer is that if you own quality stocks it will cost much more. Do dig into that a little more, to gain the level of protection for your portfolio you need to buy puts that are close to, if not in-, the money. Those options are very expensive. I don't want to spend more than 2% per year for my hedge, especially since no one can predict with any certainty when the next major downturn in equities will happen. We know it will happen, just not when. It may take a year or two or three or... If your cost of hedging is high you may be better off in cash.

    "Secondly, do you feel it's better to buy inexpensive deep out of the money puts that will likely expire worthless, or expensive at the money puts that have a far greater likelihood of paying off in the short run?"

    Once again, I prefer to keep cost low. Thus, I prefer to buy out of the money puts. But I also emphasize buying puts on stocks that are likely to fall faster and further than the general market. If you buy puts on companies that perform as strong or stronger than the indexes you might as well buy puts on SPX, some other index or ETFs. The problem with that strategy is that buying puts on the broad market means you are betting against the best companies along with the average and worst companies. You can only expect average results. You should gain a better understanding of how much better the leverage can be in buying out of the money puts on companies that perform most poorly during recessions in Part II (coming in the next few days). Or you could go back to read the first three articles in the series for a more detailed explanation. Here is the link to my instablog containing all the links to previous articles from this series.

    "And finally, taking decay into consideration, do you think it's better to buy puts that expire three or so months out and keep rolling them or to buy puts that expire a year out and to roll them 4 to 6 months before they expire?"

    Keeping durations short will generally cost more in the long run. The way to look at it is the cost of the put option per month. That is one of the steps in my selection process. Again that one is better explained in the 4th article in the series; the link can also be found at the link above. The other piece of this cost analysis is the cost incurred in rolling the hedge position. This includes commissions for each re-entry. Commissions are small but can add up. As you can see I had over 40 transactions to put on my hedge. Think about doing that several times a year. Also, when the market turns, we don't know how long it will take to bottom. You may need to add new positions after the market has begun to fall in order to remain hedged. Those new positions will be more costly and eat into your hedge gains. I like puts with an expiration of at least 9 months.

    Hope this helps!
    Dec 7, 2014. 06:33 PM | 1 Like Like |Link to Comment
  • QuickChat #276, November 27, 2014 [View instapost]
    SHB & LT - I also see the deflationary headwind taking several years to play out, maybe even longer than LT expects. All I meant is that 3.x% looks better today than it has in my lifetime, but I prefer a little growth (appreciation) potential with that. Stocks scare me, but I hedge against disaster, so I can stay invested without worrying about a crash scenario. Thus, I can take what the market gives me in appreciation and get some decent yields too boot.

    It all boils down to comfort levels. We are all different in our approaches even though needs may be similar.
    Dec 6, 2014. 05:21 PM | 2 Likes Like |Link to Comment
  • QuickChat #276, November 27, 2014 [View instapost]
    Poetic, maybe, but it still stinks!

    Just kidding (sort of) as I thought the retort to be exceptionally well worded. Thanks, SHB!
    Dec 6, 2014. 05:15 PM | 2 Likes Like |Link to Comment
  • QuickChat #276, November 27, 2014 [View instapost]
    SHB - I can't help thinking that for most of our lives we probably would have laughed at 3.2% interest rates, but today it doesn't sound so bad. Still I just can't lock in that rate for 30 years. I expect inflation before then. But that is the whole purpose of buying a fund; so you can sell it if needed. Of course, you'll probably be long out of that fund position before any real inflation heats up. I guess we just have to take what the market will give us these days.
    Dec 5, 2014. 11:17 PM | 1 Like Like |Link to Comment
  • QuickChat #276, November 27, 2014 [View instapost]
    Never consider your updates as interruptions. I am not here a lot but want you to know that you are in my prayers and I hope the Center can get you back on your feet.
    Dec 1, 2014. 07:38 PM | 6 Likes Like |Link to Comment
  • QuickChat #276, November 27, 2014 [View instapost]
    SHB - I like the idea of going long SPX and short EEM (ishares emerging markets). Even if SPX falls EEM has a tendency to fall further and faster. But I would only do this as a spread. EEM would include many of the markets that are heavily dependent upon resources (ex Canada and Australia).
    Dec 1, 2014. 07:12 PM | 2 Likes Like |Link to Comment
  • Hindenburg Omen Issues Biggest Cluster In Years - Let's See What Happens Next! [View instapost]
    I am placing some new hedges today before the close; buying puts on companies that I expect to get ravaged in a sharp market decline. I'll probably buy out of the money puts with long duration so that if nothing happens I can hold as insurance to protect my long positions that I hold for div income.
    Dec 1, 2014. 02:40 PM | 5 Likes Like |Link to Comment
  • The Time To Hedge Is Now! Candidate Summary [View article]
    Currently working on a project with my son with a deadline later today. Once that is put to bed I plan on finishing an update to be submitted for publication by tomorrow. Thanks for your patience!
    Dec 1, 2014. 02:37 PM | Likes Like |Link to Comment