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Vinay

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Subject : RE: ATM Hedging feature
Posted : 2/19/2018 8:47 AM
Post #44107 - In reply to #44095

If we try to hedge our portfolio buying Put options as ATM seeks to implement, it is bound to affect the returns adversely, because we need to keep on buying protection every week/month which may become useful after several months but we will need to pay premium every week/month. In the long run the option writer is always the winner. So for me this is not a viable option.

As far as Jim's suggestion of using *use tighter stops* and *diversify* is concerned I have a different view (sorry Jim). If we use tighter stops they may or may not protect us from disaster when the "doomsday" comes because there is high probability that our stop orders will not get filled at our stop levels. Even if that were to happen the tight stops will kill our portfolio by thousand cuts by getting us out frequently at the wrong time when market conditions are normal.

Regarding diversification we all know that it works when the market behaves normally. When the "Black Swan" event occurs or when we are hit by the "Fat Tail" the equity diversification becomes useless because under severe stress the correlation between all shares quickly approaches one and they all fall like nine pins at the same time. So diversification fails us when we need it the most.

After dabbling into stocks for more than 3 decades I have come to believe that there there is no surefire way of downside protection in stock markets. The only way to survive in this market is NOT to use margins and never borrow money to play this game. If you stick to this simple principle I am sure you will always survive any Flash Crash or another 2008 to fight the battle and recoup your losses because the recovery after the fall is also always commensurate with the degree of previous fall.




[Edited by Vinay on 2/19/2018 8:59 AM]

Deleting message 44107 : RE: ATM Hedging feature


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