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.
Comments 6
Hi,
I talk to a few trader friends from time to time here locally and abroad and they all seem to love stocks. They always buy stocks and pay no attention to the current trend, which is still down by the way as measured by the 200 day sma line of the SP500 etc. As soon as they sell one stock they look for another all the way down in bear markets. That is a very dangerous thing to do. I have learned the hard way that most of us are not as smart as we think we are when it comes to investing. To me stock trading is similar to a gambling addiction, but that is just my opinion based on my observation of the traders that I personally know. Some of these guys are holding stocks that they bought 5-6 years ago that went down and they are refusing to sell till they get their money back. One guy I know even paper trades now because his investments are whacked and he apparently has no available cash to trade till the market rebounds, hopefully sometime in his lifetime.
G.H.
I appreciate that you show both ‘SH’ and ‘MYY’ for Short Positions.
Your thoughts on using ‘SH’ is proving to be correct so far.
Nice Going!
StarBright, Thanks for the nod.
I think the operative phrase is “so far.”
It’s safe to say that if, in fact, the S&P; 500 were down 5.24% rather than up that I’d be wishing I had chosen some Chevrolet mutual funds rather than the Porsche funds I’m using, if you get my meaning.
I’m enjoying the unrealized gains for now but in hindsight I might have preferred to be in the “SP LargeCap Hedge” as represented by the third table on my page.
But for now, if the market does swing back to the downside at least I’m only exposed to at most a –3.78% loss (plus whatever further losses the mutual funds show by the close of the actual trading day that I might chose to sell.)
Today was a very crazy day involving my fund choices. The single day beta for ARGFX and FLCGX today was 6.6 and 4.3 respectively! These numbers are not common but if this market does turn for the worse it could be look out below for these funds.
And this week we’re going to be treated to some important data points including PPI, Retail Sales, CPI, Industrial Production, NAHB Housing Index, Initial Claims, Continuing Claims, Housing Starts, Philly Fed Index, and U. of Mich. Confidence Index.
These reports could make for some dramatic market moves as we go through the week. The only question is, which direction.
G.H.
Ulli,
G,H. what the heck are you doing in the market anyway as it is a down trending market and it is like trying to catch a falling knife. Why not just go to cash and relax till the market turns and a buy signal is generated or at least the long term moving average line turns up. Currently that line is still going down sharply.
I use both Trade Station and Fidelity's baseline trading platform. They both have the MOO & MOC feature.
Trade Station ‘timed orders’ are implemented via their “activation rule” feature and orders can be placed anytime for anytime during the 24 hour day.
Fidelity’s baseline platform is a bit more restrictive; a MOC (market on close) can only be placed 0930 – 1530 (ET); they refer to these as “time in force” orders; “on the close” type trade.
Anon,
You must not have read my e-book on hedging. That’s what the discussion is all about.
Ulli…