16 replies to this topic

[arbman]

In our village, there is a technology for that - it is called 'stops'

Let me tell you an example where you are exposed to an unlimited risk; the Fed realizes in March that they made a massive mistake and immediately lower the rates, the result; the futures spike at least with a 30-40 points gap and never come back for at least 2 months, you are immediately wiped out. I think the stops are good for VST and small trading positions. I never use simple stops for the IT or large positions that are heavily leveraged.

- kisa

[greenie]

....but if you follow xD's method, he takes his positions at important price pivots, when the markets are overbought. He does not take new positions at major lows or even in the middle. The setup you described (Fed lowering interest rates and market rallying 30-40 points) is more likely to happen at the oversold levels. Check internals etc. at the end of 2000 for example. When Greenspan lowered interest rates in a 'surprise move', the market was already oversold and was internally trying to come up. Greenspan just gave a bit of reason to it. I know there is always an element of chance involved in this business, but things do not happen as drastically as you described.

[slupert]

closing the rest of the qqq and iwm and shorting futures

with this closure i will have no ETF position left, all will be in futures.

i am overall up more than %50 on those SPoos, NQ, and ER2 that i shorted at the top of the bull market

i will be utilizing this capital gain as well as the buying power from the closure of ETFs by shorting more NQ, ER2 ... After the first significant snapback , I may close some NQs and lean harder on S&P prhaps Dow as the selling should spread towards safe havens in later stages

i am still keeping semis and other individual stock shorts, and i will till i drain the last drop out of them

this was the snapback watch it drop like a rock tomorrow and Friday. just my humble opinion

[greenie]

another thing - long before Greenspan lowered the interest rate in 'surprise move' in Jan 2001, the markets were pricing in a rate cut. You can see that from the interest rate futures of late 2000. It was the stubborness of Greenie in lowering the rate, when the markets demanded it, made him go with the surprise cut. What I am saying is that if Fed finds out that they made an error, it is already known by the markets. You have to give a better example

[arbman]

Thanks for beating me up with it... twice! yes it was a poor example. I guess the better technical talk without even a need for an event example is that the overbought can get more overbought and the oversold can get more oversold...

I think I am more comfortable with a large position when I am hedged, I found myself making wrong decisions when exposed to large leveraged positions, even with stops. Beside, when you place a stop order, the mms usually find a way to take them. When you don't, the market moves too fast for you to react. Proper hedging is always better, sure the comfort does not come cheap...

For example, I had a large short on Friday closing despite the heavy shorting and high P/C going into Monday. You know what I did? I went 3 units short on in the money RUT puts and 1 unit at the money SMH calls and 1 unit slightly out of the money OIH calls. Sometimes, I sell options to cover the cost of the hedging a bit, but I usually do this for the IT positions, not for shorter term positions. The dollar ratio was roughly 3.5:1 and represented about 20% of my capital in a highly leveraged setup, not only RUT dropped and I covered, subsequently SMH and OIH rallied to break even, because I knew these two were the first to bounce from an oversold position and much stronger than the RUT. I closed pretty much everything on Monday and left a few OIH calls today for gambling money, never mentioned here and I am not taking credit about that OIH trade, but it goes to show that usually it is much easier to trade with the proper hedging and gives you comfort to stay in the position in the volatile markets...

- kisa

Edited by kisacik, 07 March 2007 - 07:51 PM.

[arbman]

btw, I just went back and checked the trade, the unit ratios are nearly equal for everthing and the dollar ratio was 2.7:1, not 3.5:1. The RUT puts (delta -0.75 or so) were for April while the hedge with SMH (delta 0.7) and OIH calls (delta 0.6) were for March (average delta 0.65). In case of a 30% loss on the RUT options, the SMH and OIH options would go up about 70-80% based on twice the 20 day volatility ranges. So, I was exposed to about 2.7 * 0.3 - 1 * 0.65 = 16% risk there or I would loose about 20% * 0.16 = 3% of my entire trading capital. By staying in the position, I made about 38% on the RUT position and this translated to 38% * 2.7 / (2.7+1) * 20% = 5.5% gain (roughly) on the entire capital. Had I lost some 30% on the hedges, it would've translated roughly to (2.7 * 38% - 1 * 0.3) / (2.7+1) * 0.2 = 4% gain on the capital. In a sense, although this is not a great trade which magnified roughly a 1.8% drop in RUT (for my intraday entries, the actual drop was larger) there to 4-5.5% (or around 250%) since the risk to reward is high with 4.75:3, a larger drop would've actually benefited the trade significantly. I looked and found out that I made around 5.9% on the entire capital for Monday, so my guess is the numbers above are still slightly off somewhere, probably I took a bit more risk than I am claiming in the deltas...

Edited by kisacik, 07 March 2007 - 08:45 PM.

[A-ha]

kisa, I rarely hedge a position directly. I dont use hedging unless if there is a significant risk in short term that can cause a forced liquidation or something like that. (for example last summer I had bought puts one day intraday when I went fully long spoos at 1230-1235, in case if the market plummets fast below the trend line, i think i posted it here too ....that was the last hedging i did) What I do is I usually have other positions in the portfolio that tend to work as a hedge. For example having oil long and nasdaq long. Right now, my largest short position in stocks is BHI , I am short it from 70 area as i posted here realtime.... I believe it is going lower over the long term but it also tends to move in the opposite direction of my other shorts in semis and tech in very short term, just like today. because it is one of the defensive sectors. Regarding futures position, I use gradual stops. Right now, my only concern about my futures positions is how to protect profits. curently i keep a mental stop above the trend line seen on 4 year weekly spx chart i posted this week. That will take me out with 35 point profit if the market rallies and breaks above that line.