To hedge or not to hedge?

Discussion in 'Trading' started by alanm, Mar 8, 2002.

  1. alanm

    alanm

    Last night, there was news that BA got a contract from the DOD for $1B/year over 5 years. This seemed insignificant compared to their $60B annual revenue, so I put out 1100 up $1.30 from the close.

    Everything was looking good this morning until the jobs report lifted everything. The Dow was up almost 1%, and took most of the profit out of my trade as a result.

    Tonight, I'm short (just 500) WMT, on similar stupid news runup (dividend upped by $0.02/yr, insignificant buyback).

    I've considered hedging with an equivalent opposite DIA or SPY position (or ZD or ES futures position yesterday), but didn't pull the trigger.

    Anybody have any thoughts on this?

    Do you routinely hedge or partially hedge news arb positions like this (assuming you trade them - I'm not really looking for an argument on that)?

    How often do you end up getting boned both ways because something happens to your stock to move it against you AND the hedge loses money for a different reason?
     
  2. Look at how IBM closed on Friday. I got long the stock when it made a new high, then it started to drop and went straight to it's low for the day without letup. IBM can make large moves very quickly and when I trade it, I know I need a wide stop. But when it really started to crater and the bids were coming down so fast, I knew I wouldn't get out at my original stop price and immediately shorted some SPY's, which mitigated the loses while I managed my exit on IBM. The hedge worked and my overall loss was minimal.

    I also do this if I have several open positions all on the same side and the s&p futures really start to run against me. I hedge off with spy's and then go to managing exits/stops on the open trades.

    If your trade goes against you because of a news event or something sector related, it might not follow the spoo's so the hedge might not be a good idea then.
     
  3. I don't think I would hedge with an index after you put on the trade. If news was out that would rally the market, then the index would already be much higher, and if there is no news, then you don't want to end up with a double loser (market down, WMT up). Your play is pretty common, and seems to work ok as long as the Company itself doesn't start "painting the tape" with additional nonsense news items.

    Good Luck!
     
  4. I have watched a number of people that either
    purchase options or indexes to hedge a losing
    trade. In most cases they probably would have
    been better off to stop loss the trade rather then
    to attempt to hedge their rapidly increasing losing
    position.

    My view is that if your initial written trading plan
    called for the use of the type of hedging and you
    had outlined a strict strategy.... then you should
    should implement the defined hedging strategy.
    Most traders attempt to hedge on the fly when they
    are already deep into a losing trade rather than
    doing what they should have done... which is
    sell (or cover) and get out.

    Just my thoughts....

    - Greg
     
  5. alanm

    alanm

    Just to clarify, I'm talking about trades that I put on in the after-hours session. I'm essentially putting on a spread to lock in a profit on a stock that has become over-valued in relation to the rest of the market, but I can't close the trade at a profit until the next morning, when the "smart money" brings the stock back into line. That is, I want to hedge out the risk of overall market movement until liquidity appears at the opening.