Timing The Hedge

Several readers have emailed over the past few days requesting some details about the execution of the hedge trades.

The issue is when setting up the hedge by purchasing SH for the short side and mutual funds for the long side, which order do you place first on days when the markets rally sharply?

This certainly was the case on Monday as all major indexes shot into the stratosphere. On Monday morning, you could have placed your (long) mutual fund orders to be filled at that day’s ending prices.

But what about SH? Entering the order and getting it filled early or at mid-day would have exposed you to losses as the market rallied on.

I was caught in that exact position. Due to a prior commitment, I had to leave the office about an hour before the markets closed. At that point, the rally was on and the Dow was up some 300 points and rising. My plan had been to simply enter the short position as close to closing time as possible to limit any adverse price action.

Since that was not possible, I simply postponed any action and will enter my long and short positions on a day when I will be around at closing time.

I suggest you follow a similar pattern so that you don’t enhance the odds of starting your hedge with a slight loss.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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