Recently, reader G.H. mentioned that he had difficulties when setting up a hedge position (see my free e-book on the topic) using mutual funds on the long side and ETFs on the short side.
Here’s the issue. You enter your (long) positions for your selected mutual funds. The order will be filled at the end of the trading day. How about your short position? If you enter it early in the day, and the market rallies, you’ll end up with a loss for the short position before your hedge is set.
To minimize any adverse market moves, I have waited with my short order until about 20 minutes before the market close to execute it. As luck would have it, the market rallied into the close that day, and left my now filled hedge position with a negative -0.75%. In the past, this type of scenario has at times worked in my favor, and I ended up starting my hedge position with a small profit. So you never can be sure.
Is there a way to avoid this kind of uncertainty and start out a break even point? Yes, there is, and here’s how I solved this issue.
I checked with my custodian’s (Schwab) trading desk, and they confirmed that I can fill an ETF position at very last moment via an order called “market on close.” This has been around a long time, and I remember using it on occasion some 15 years ago.
Since online trading tools do not feature this type of order, Schwab informed me that I can call it in, and they will process it at no extra charge. From hereon forward, this will allow me to set up my hedge at ground zero with no slippage due to market behavior.
I am not sure which other custodians offer this feature, so be sure to check with yours and post your findings in the comment section so that others can share in your experience.