Exactly. Every long position should be hedged with a similar short position. If you are managing an unhedged Portfolio... And thus making directional bets... That is... "picking stocks" when 1,000 or 10,000 insiders know more than you do... Then you are a "subsistence level gambler"... And not a professional trader.
Things like BSC just remind you how important diversification and risk management, even on small time frames. Puts are cheap protections. You should check out this bloomberg piece http://www.bloomberg.com/apps/news?pid=20601109&refer=exclusive&sid=aHfkhe8.C._8 The part I found interesting was how Nassim Taleb's fund was hedged so that it couldn't lose more than 13% a year. It's a good read
Dee: If your not talking about buying puts on any long position then I'm assuming your talking about shorting another security in the same sector that is weaker and likely to go down as the rest of the sectors goes higher. But if your long stock suddenly became an enron, I don't see how that would cause your short position to hedge the sudden loss in your long position(unless of course it had developed accounting problems at the same exact time).
Get out immediately. Then, if you are experienced in trading crash situations, you place the trade that you would do normally, if you had had no position in the first place. Which is normally a short. Very rare to see accounting fraud, and the stock bottoms the same day the fraud is announced. The only times that happens are when the announcement has been widely anticipated and so is already in the price - in which case it wouldn't fall 50% on the news announcement, more like rally that amount.
The only time it is too late to sell is at the bottom. If you got caught out by a surprise collapse, and the outlook is for further losses, it would be truly moronic to not sell on the grounds that it's "too late". If you've never had a large unforseeable gap against you, then you simply haven't traded much.
Lol, you think hedged positions can't blow up too? In fact, since hedged positions are almost always more leveraged (since they return bugger all without leverage, in most cases), they are actually more risky than outright directional punts. LTCM blew up after a mere 4 years of fixed-income "arbitrage"; Soros made pure directional bets for 39 years and he's still going strong.
Well I think he hedged so that maximum possible loss would be 13%. So if the market crashed or something the most he could possibly lose was 13%.