Be prepared isn’t just for boy scouts.
As I mentioned in yesterday’s post, we are in technical hell and the lack of recovery yesterday has left us on less than firm ground. As we still have clearly defined watch levels that aren’t too far away, now is a good time to look for some downside hedges that can help us enjoy the ride down while it lasts.
I was going to be pleased but then we had a very sharp, last minute sell-off on heavy volume that pretty much ruined the day. I have been bullish and we have been buying at what we thought was a bottom, and we are up to 35% invested in long-term, hedged positions but what if the 20% built-in protection (see “How to Buy a Stock for a 15-20% Discount“) isn’t going to be enough?
You know I am a big fan of taking cash off the table in either direction, and we were not greedy and took off our short-term bearish directional bets on yesterday’s morning spike down. We had a couple of new hedges already in this week’s Member Chat but let’s look at some other trade ideas that can bullet-proof our portfolios, all the way back to the March, 2009 lows. Our usual Mattress Strategy is not going to be enough to save us if we have another “flash crash” – especially one that sticks! Adding a layer of protection here doubles our returns if this is the first leg of a major sell-off, or it gives us a smaller hedge that we can roll up later while we take our earlier hedges off the table. As I have to say WAY too often to members – It’s not a profit until you cash it in!
Hedging for disaster is a concept I advocated during another “recovery,” in October of 2008, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – “just in case.” That “just in case” saved a lot of portfolios! The idea of disaster hedges high return ETFs that will give you 3-5x returns in a major downturn. That way, 5% allocated of your portfolio to protection can turn into 15-25% on a dip, giving you some much-needed cash right when there is a good buying opportunity. At the time, I advocated SKF Jan $100s at $19. SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting even just 5% of your portfolio into that financial hedge would give you back 75%…