Tuesday, November 13, 2007


Out of the woods?

The past few days, when my portfolio was getting ravaged by the bears, how I wished that my portfolio contained a few short positions. I was 100% long. A few shorts would have definitely eased the pain. I read a few articles which mentioned a balanced portfolio should contain 70/30 or 80/20 long / short positions... i.e. 70% long and 30% short or 80% long and 20% short. Well.. the market has given us a chance to do so.

It was a nice day for the bulls. I did recover some of the losses I've had the past few days, but not nearly enough. Are we out of the woods yet? Perhaps not. The market's fallen down so much so quickly that it's created a lot of resistance levels up ahead.

I had mentioned the 134 level in the DIA in a prior post as a strong support area which was broken. This could now end up being a resistance level.

SPY also could be running into resistance.. perhaps around the 149 area.

I would still be careful in this environment. I'll be looking for some low risk short/put entries at possible resistance levels to balance my portfolio.

Trade well!

nice post AJ! i'm having the same problem, 100% long. but the question is what type of '30% short' is best? i've tried this before and just lost money. this past late spring i had SPY puts that cost a lot of money and ultimately expired worthless (about 1 month too early to cath the summer sell off). i could buy QID or something but if we get into a 4 to 6 month rally then drop...well, chances are that you'd still have a net loss.

i've been trying to decide which way to get short without burning money while taking advntages of sell offs and i think the answer may be none of the above. it seems the best way to have a good long/short portfolio is to constently look for short plays even in a bull market. problem i have is that i have had little to no success trading puts.

other option might be to hedge with QID only when the market gets choppy but that might be tough to call too.

how do you plan on hedging yourself?

j.M, Thanks.
If you hold a largish position in a single stock, you could sell covered calls. That could act as a hedge for your long term stock position.

IMO, buying puts on the index as a hedge might not always work out, since time decay could quickly eat into the option price.

As I've mentioned in my post, I've been guilty of not balancing my portfolio, so I can't advise you too much on this, but for now, you can look for stocks that have broken support, or have run into resistance, and either short such stocks or buy puts on them. Even in a bull market, there will always be weak stocks, it would be a good idea to hold such stocks short in your pf.
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