To Hedge or Not to Hedge. That Is the Question

The market, as represented by the S&P 500 Index, has undergone a significant rally in recent days, rising from a low in the 740s to a move above 900.  If you are a very long-term investor who intends to hold – no matter what happens, then this discussion need not concern you.

For all other investors who watched their brokerage accounts get slaughtered, this is assuredly a bit of relief.  But, the question is: what comes next?  And more importantly, is there anything you can/should do?

You can maintain your holdings, hoping that the market has seen a bottom and that the future is bright.  You can sell a portion of your holdings as a hedge against a return to the lows.  You can even unload everything and go short the market.

Or, you can consider using options to hedge all, or a portion of your assets.

Consider a collar strategy.  That allows you to collect limited  gains, if your stocks continue to rally.  In return for sacrificing the possibility of a large return, you achieve a guarantee of incurring limited losses, if the market returns to its declining ways.

This method is not for everyone.  You must decide if you are willing to give up on the (remote) possibility of recovering the large losses of 2008, in return for the assurance that it your account cannot get slaughtered again.

Other option strategies are available, but the big decision is "to hedge or not to hedge."


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