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Mark Bern, CFA  

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  • The Time To Hedge Is Now - May 2015 Update [View article]
    Doug - Glad to hear I am not the only fool to use consider such a strategy. I am not a member of MF but occasionally read an article. Like you, I don't like to short stocks, especially if the company pays a dividend. It ties up too much of my cash to secure against being wrong. Plus, if one is wrong, there is no limit to how much the loss could be. Puts define the maximum loss of risk and it is cheaper. Those are two of the main draws of this strategy for me.

    I tinkered with other methods while experimenting with this one and became convinced that this was the best approach for me. Others will have strategies that provide them with more comfort. We all, as individual investors, need to find the approach that works best within our own overall strategy and goals. Traders can just sell and wait; investors need to hedge.
    May 29, 2015. 12:04 PM | Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    Doug - Well said and thank you for your input.
    May 28, 2015. 09:48 AM | Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    nicholas - First of all, this is merely an update to a series of articles. To fully understand the strategy one would need to read at least the first two articles in the series. That is why I provide a link to earlier articles from the series near the beginning of the article.

    Second, I never but puts on stocks that I own as you seem to imply. One of the main points of this strategy is that I can continue to hold the quality stocks in my portfolio without having to use stops and create a taxable event. I don't like to trade. I invest long term and hold.

    I try to choose some of the weaker companies in industries that get hit hardest in recessions, assuming that we would experience a recession if the market fell by 30% or more. My higher quality holding do not fall as fast as the broad market, while the stocks I sell puts on fall faster than the broad market.

    If that does not help, please consider the more detailed explanation provided in the first two articles in this series. Just click on the link below: http://seekingalpha.co...

    The link will take you to an instablog I posted with links to all the articles in this series for reader convenience.

    Thanks for reading and I am sure you will be able to understand the strategy better after reading the first two articles. This is a low cost strategy. That's the other primary point.
    May 28, 2015. 09:46 AM | 1 Like Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    kfarah - My exit strategy is explained in detail in Part X of the series. I am afraid that a short answer here in the comments might not be comprehensive enough. Here is a link: http://seekingalpha.co...

    Thanks for asking.
    May 28, 2015. 09:37 AM | Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    usmckris - We all have our comfort levels and strategies. I certainly respect your position.

    To be clear, though, I would never employ this strategy every year regardless of where we are in the business cycle. I like to keep the costs low so there is no reason to hedge, in my opinion, until a bull market has been going for at least the average length. I will miss some, but I don't expect to miss the big ones like the last two. Each has come after a lengthy bull market. The longer the bull is prolonged with easy money or any other form of artificial stimulus such as QE, the harder the fall is likely to be. So, to conclude, I am hedge only about 1/3 of the time or less. That just seems reasonable to me.

    As far as catching the bottom or the top, I don't expect to do either. I provide my exit strategy rules in Part X of the series, if you are interested.

    Thanks for sharing your perspective.
    May 27, 2015. 09:17 PM | Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    harryjack - Interesting perspective. Thanks for sharing.
    May 27, 2015. 09:09 PM | Likes Like |Link to Comment
  • QuickChat #280, April 16, 2015 [View instapost]
    Really incredible, ungawah! Thanks for sharing.

    Maya - Thanks for describing your entertainment. Nature can be amazing if we just take time to watch.
    May 27, 2015. 04:06 PM | 3 Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    hsfrey - I'll answer your last question first then go back to the top of the list. An out-of-the-money put option for SPY will not provide the same amount of protection as an option equally out-of-the-money for a group from this list. I can't guarantee anything, but the stocks underlying the options listed have a tendency to fall much further and faster than the broad market (represented by SPY). Thus, to get a similar gain from a put on SPY if the market falls 30% you will need to purchase SPY option at or near in-the-money. SPY will fall at the same rate as the broad market because it is the broad market. GT has a tendency to fall much faster and further so we don't need to be in-the-money to get the same gain. This makes the option listed for GT much cheaper for the same amount of coverage.

    1. "Possible % Gain" Strike price minus Target price divided by cost of the option. This assumes that the price of the underlying stock falls to the target price when the overall market falls by 30%. This may seem ridiculous at first glance, I know. But when you consider how far GT fell in the last two major bear markets (95% and 89%). The target is well above those levels to compensate for the possibility (or likelihood, if you like) of a less severs bear market of only 30%.
    2. "Total Est. $ Hedge" This is the potential dollar amount gain from the individual position with the number of contracts specified. The calculation is Strike price minus target price multiplied by the number of contracts. It represents neither a minimum nor a maximum. But if the underlying stock reaches the target price before expiration the total estimated dollar gain will approximate the gain that should be available should the invest then decide to sell (close) the options position.
    3. I calculate the estimated gain per contract, then divide $3,750 (1/8 of $30,000) by the result. This provides the number of contracts necessary to protect a $100,000 portfolio against a loss of $30,000 with 8 positions. Each position must be able to produce a gain of approximately 1/8 of $30,000, or $3,750, to protect against a 30% drop in market value of the broad stock market.

    Thanks for the questions and I hope this helps. If not, please consider reading the more detailed explanations provided in the first 3 articles in the series. That will help with understanding the strategy better if you have the time. Links to those articles can be found here: http://bit.ly/1HM7Y7Y
    May 27, 2015. 03:53 PM | 1 Like Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    Piptief - I have considered momentum stocks, but am leery because most are in early stages and some could actually turn profitable killing much of the potential downside. I like to stick with what I understand best and that universe consists primarily of dividend-paying stocks. You may actually have a better understanding of momo stocks than I and be better able to pick the worst of the lot and be successful in doing so.

    On leveraged inverse ETFs, I have done this also and had mixed experience. The problem is in timing. If you are right early they work wonderfully. But there is also a very expensive downward bias in play that guarantees that, over time, these ETFs will always go lower. They usually use front month futures contracts and role the position before expiration each month or two. Every time they roll, there is a small loss built into the transaction. It's just the way it works. So, holding leveraged inverse ETFs can lose a lot more than 1-2% per year while you wait for a major correction to come.

    I try not to time the market, just guard against significant losses.

    Thanks for sharing your perspectives.
    May 27, 2015. 03:20 PM | Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    bud4704 - The hit isn't as big as you may think. If the market falls by 5% from current levels most, if not all, of these option positions will profitable. The profit won't completely offset the overall lose on the portfolio at that point, but it will lessen the loss that I would have to suffer without any hedge.

    We need to remember that option prices move with the underlying stock, generally in a magnified manner relative to the stock, either up or down. When a stock is down 5%, a put option could be up only 5% (if in the money) or up 100% (if well out of the money).

    I count on most of these stocks falling faster than the general market and the out-of-the-money put options to gain significantly faster than the underlying stocks. An option does not have to be in the money to turn profitable unless it is close to expiration. There are a lot of moving parts to consider. Thanks for the comment and I hope this explanation helps.
    May 27, 2015. 03:10 PM | Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    Lakeaffect - Not a bad idea, but I haven't done the homework yet to identify the best candidates for such a strategy. Companies that get a majority of revenue from outside the US, especially Europe and Japan, could be worth a look. But I would focus on the dogs with weak balance sheets and falling sales/earnings.

    Thanks for reading and for the question.
    May 27, 2015. 10:36 AM | Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    Doug - I sell calls on stocks I hold whenever those stocks are at or near highs (if I don't already hold calls from the last time we were here). That is part of my regular strategy to enhance my portfolio income. It also provides the extra return to keep my income stream very positive while I employ this hedge strategy. So, in a way, I do use those proceeds to fund my hedging. But that is not why I sell calls.

    Thanks for commenting.
    May 27, 2015. 10:33 AM | Likes Like |Link to Comment
  • The Time To Hedge Is Now - May 2015 Update [View article]
    bk_h - Index puts are generally more expensive. I explain why in Part VI of the series as indices and ETFs include all the best companies along with average companies and the worst companies. Thus, those instruments will fall at the same rate as the broad market instead of faster. The cost for the same coverage amount becomes higher.

    Thanks for the comment.
    May 27, 2015. 10:29 AM | Likes Like |Link to Comment
  • Swine Flu, MERS, Ebola And Medical News Concentrator May 23, 2015 To ?? [View instapost]
    Thanks FPA! You diligent work here is highly appreciated!
    May 25, 2015. 11:33 AM | 5 Likes Like |Link to Comment
  • Swine Flu, MERS, Ebola And Medical News Concentrator January 1, 2015 To May 23, 2015 [View instapost]
    Guns - INSY only down $2.65 (4.43%) today. Still plenty of room to fall. We should have picked up put options on INSY today had we known. The June $50 put WAS selling for $1.50 premium/sh. If it drops to that level by mid-June one could pocket about $5.50 per share. Today's volume on that option was over 5,000 with open interest of under 450 contracts. Lots of people knew about the problem earlier in the day and day traded, or so it appears. Those contracts rose 233% today.

    This isn't my typical type of trade but I thought I would provide an example of how some people are able to trade on information as it comes out. Somebody, somewhere connected the dots before ZH published the article.
    May 20, 2015. 06:13 PM | 3 Likes Like |Link to Comment
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