"Prophesy as much as you want, but always hedge."

 The  wise words of Oliver Wendell Holmes, Sr in 1861.

Oliver Wendell Holmes, Sr
Poet, Father of Supreme Court Justice

Hedging.  Good advice then, excellent advice now.




4 Responses to Hedging

  1. Blue cat 04/04/2009 at 11:23 PM #

    Nice hedgehog. What’s the one thing he knows?
    The following is from my trading blog.
    Palm, the maker of the formerly hot Treo and the soon to be hot Pre, has been getting a lot of attention recently. It jumped from 1 1/2 at the beginning of December, to 3 at the beginning of January, soon thereafter to 6 and then to 8. Just yesterday I saw another positive article about it. Now it’s nearly 9 1/2. I wish I had bought some at 1 1/2.
    And that’s why I’m writing. Regret is so poisonous. Not only is it poisonous, but it’s also both useless and distracting. What’s really important in trading (at least it seems so to me) is what one is able to do on a continuing basis.
    Sure it would have been nice to ride Palm from 1 1/2 to 9 1/2. And if I had bet everything all on it, perhaps I could retire. But no one is going to make that sort of bet. At best, it would have been a nice profit. But given the amount I would have been willing to risk on it, it probably wouldn’t have changed my world even if I had managed to multiply my investment by a factor of 6.
    The question always has to be: what do I do now. How do I manage my approach to trading so that I am successful tomorrow. The only way regretting a missed opportunity can help answer those questions is if I can learn something from what I missed and not miss another one like it.
    Did I learn anything from Palm? My field is computers. I did hear about Palm’s success at the Consumer Electronic Show. At that time it was 6. I suspected that I should look into it further. Instead I let it slide, thinking it might come back down. But I didn’t look into it, and it didn’t come back down.
    So what now? I just submitted the following order — to be executed Monday.
    Sell May 7.5 Puts
    Buy May 5 Calls
    Buy May 15 Puts
    If Palm expires in May between 7 1/2 to 15 this trade makes a small profit. Below 7 1/2 it loses down to a maximum of a bit over $250/contract. Over 15 the potential profit is unlimited.
    Is there any chance Palm will shoot up over 15? Not very likely. But it’s possible. (Perhaps someone will try to buy it out.) If it happens, at least I won’t regret not having done anything. In the mean time, there is the greatest likelihood of a small profit and what I consider a small probability of a limited loss.

  2. Mark Wolfinger 04/05/2009 at 9:01 AM #

    1) When providing an example such as this, I think it’s a VERY BAD idea to name the specific stock. You never know who is going to be convinced to try to jump on the bandwagon now. I don’t like encouraging such activity. I know you didn’t encourage it, but you must know that people don’t always hear what is said or read what is written. Many read what they want to read and this may seem to be a recommendation to buy the stock now. No matter how many times you write to say it is no such thing, people read what they want to read. That’s human nature.
    2) I agree 100%. Regret solves nothing and teaches no lessons. Tthe only thing that matters is: What do I do now? What do I add or subtract from my portfolio? Do I want to maintain ownership of my positions? Must I make an adjustment to reduce risk? etc. The past is past, and that’s one reason why I prefer not to look at ‘is this trade profitable?’ To me, all that matters is: do I want to continue to own it at today’s prices.
    3)I hope you are making the proposed trade on its merits, and not to prevent regretting an unlikely event. Once again, unless you are in the business of making specific recommendations, I very much dislike giving readers specific examples.

  3. lynx 04/06/2009 at 4:59 PM #

    Let’s not forget the classic scene in the movie “Arthur”, where Dudley Moore trips over the hedge and then gets in a fight with it, screaming “Oh, you’re just a hedge!”

  4. Mark Wolfinger 04/06/2009 at 6:50 PM #

    Thanks for the addition.
    I’ve never seen that movie. I decided – in advance – that a comedy mocking alcoholics was a bad idea, and just skipped it.