Hedging is magic and you have to do it for all the stocks you own. I was actually cheering while stocks I owned cratered last month because I was able to buy more shares with the cash I collected on the way down.
A lot of people dismiss hedging because they say it caps your profits which is true to an extent, but more importantly if you do it right it, because of the delta shift, it limits your losses much more than it caps profits.
But you can't really hedge FAS/FAZ effectively right now because implied volatility is too high. I'll give you an example.
Let's say I have $1,470.00 to play with today and FAS is at $13. I'll buy 100 shares of FAS this morning for a total of $1,300 and hedge with one SEP 14 put for $1.70 ($170.00). I choose that put because it is the closest to neutral delta.
Using current delta and gamma and assuming a $1 move will maintain volatility and a $2 move will increase it, I can expect the following:
FAS goes up $2 my investment will be worth a little more than $1,581.00
FAS goes up $1 my investment will be worth $1,517.00
FAS with no change my investment will be worth less than $1,470
FAS goes down $1 my investment will be worth $1,437.00
FAS goes down $2 my investment will be worth a little more than $1,415.00
Can you see how the hedge is working a little bit because it's letting me make more if I'm right than what I would lose if I'm wrong?
So although it works, this hedge isn't really feasible because it's capping my profits without providing very much downside protection. And it's gauranteed to lose if FAS does not move very much. So there are two ways to lose, and only one way to win. Can't go there. So although it's a little bit effective, it's not effective enough to actually use because of the current implied volatility.
So where the hell was Biggles, when you needed him last Saturday?
