Re: hedging, I typed a few paragraphs then realised if I went into detail this really could go for 300 pages and I wouldn't do it justice anyway. There are many books and online resources that will give you a much better, more well considered content than I could ever provide. I had a quick google and this would be a good starting point if you've never ventured into the topic before. http://www.investopedia.com/articles/basics/03/080103.asp?header_alt=true
Just a few thoughts from my perspective:
Consider which assets you want to hedge. Up until recently I have only hedged stocks, but I've started to hedge my property portfolio now as well. Some assets you might be happy to let ride, some you might not be comfortable holding without a partial hedge, sometimes you might want to hedge your whole portfolio (ie a % thereof). The timing and decisions around this are very individual and are generally dictated by your risk perception around individual assets, what external factors might be impacting risk, such as margin, leverage etc and also the macro picture impacting that sector, or the economy in general.
Understand how much you want to hedge. and stake accordingly. How much can you realistically stomach to lose? Some would say you should only hedge an amount that will materially impact your financial health. Personally, I give it the "can I sleep at night test".
Some vehicles to hedge long positions below...I'll let you research, it's way too much for here.
- Broad ETF's (eg short S&P500, - SH),
- Narrow ETF's (eg sector specific short silver = ZSL)
- Pair Trades (long one stock you expect to go up, short another you expect to go down in the same sector)
- Put Options (expensive)
- Covered calls (limit upside, unlimited downside )
- Debit Put/Credit Call Spreads (cheap but limited protection)
- For Oz Property I short both AUDUSD and Oz Banks. An easy decision for me as I'm bearish both anyway. (I've also sold property in Syd, Melb this year and Perth last year to reduce risk)
Before launching into any of them be careful to understand the risks of each type. Eg: Writing calls has unlimited downside. Put spreads wont protect you in a crash etc.
I've found the best method for my situation is to use a combination of above. This reduces risk in itself and depending on the strategy can manage costs. Speaking of which, be careful to understand the full costs of hedging. Take into account spreads, broker fees, upside lost, opportunity cost of funds deployed elsewhere, etc.
Using most of the above strategies might not the best approach for small accounts, It's probably not going to be cost effective and a lot of effort. Anything under a few hundred K and IMO you're probably better off just diversifying your portfolio among sectors, currencies and countries, and buying and selling a small amount of VIX derivatives if need be.
From a timing and scaling in perspective, it's generally the same as stocks, in that you want to be adding when they are cheap and selling when they are expensive. That said, for me, my own analysis and gut feel dictates when to top up and sell also.
From an Aussie stock perspective, I'm probably not the best one to comment. My Australian portfolio is relatively small and speculative, so I don't bother hedging. I manage risk in this portfolio simply by reducing quantities and scaling out. Orwell might be able to provide more comment around liquidity and spreads in Aussie derivatives for individual stocks. There's also an ASX200 VIX you can trade, but I don't know much about it.
Again, there really are too many considerations to list here, I just rattled off a few things that come to mind. I'm miles away from being an expert on the topic, so please take above with a grain of salt. I'm also half a dozen cans deep, so apologies if this is all incoherent ramblings!
I'm sure someone like Timber1956 could provide you with some great resources should you wish to poke your head in over at the gold thread (at your own risk) Reading between the lines, I think he's held some pretty senior positions in the Banking/Finance Risk sector. Although Timber appears to be on a personal crusade to debunk gold myths, he's clearly a very smart bloke and well worth following. I just wish we could lure him over here more often to discuss stocks and the macro picture rather than how many tonnes of gold Vlad has under his bed! Timber if you're reading this, your job is done, we need you over here for some adult conversation.
(20min delay)
