hedging strategies for QE2......

[funkyronster]

Would people care to comment on the following.

Say one is generally bullish about gold and silver long term, but fears a major correction in summer when/if the Fed ends QE2.

And lets say one holds shares in SLV, doing well at the moment.

What is the best way to hedge?

I was considering a married put, but then got to thinking about an inverse silver ETF like ZSL.

Would an ATM call on ZSL be better than a married put on SLV? Would you only need half the number of options because ZSL is a double inverse?

Any other ideas?

Thanks

 

[Jason101]

Would people care to comment on the following.

Say one is generally bullish about gold and silver long term, but fears a major correction in summer when/if the Fed ends QE2.

And lets say one holds shares in SLV, doing well at the moment.

What is the best way to hedge?

I was considering a married put, but then got to thinking about an inverse silver ETF like ZSL.

Would an ATM call on ZSL be better than a married put on SLV? Would you only need half the number of options because ZSL is a double inverse?

Any other ideas?

Thanks

I don’t think you will need worry about it. I recon it will be QE3 by then, when Japan as the second largest holder of US debt, starts to off-load it to pay for its own problems.

Don’t listen to me though, I only do technicals.

 

[Jason101]

Otherwise you could try out this guy from yesterdays posts, he has some interesting ideas on hedging.

http://www.trade2win.com/boards/general-trading-chat/120630-help-what-do-next.html

 

[anley]

It's hard to have it both ways unless your timing is perfect which is probably won't be, ie be covered on the downside and make money on the upside.

Chances are you'll buy the Puts and the market will stay the same sort of level so you'll lose. Or even worse the market will drift a touch and the puts will expire worthless so 2 losses.

YOu're paid to accept risk in the markets, if you want to reduce that risk it's ALWAYS going to cost you money. The best hedge therefore if you're worried is to sell out of your metals.

 

[funkyronster]

Thanks all, I appreciate the comments.

I think I phrased the question wrongly. I was looking for a technical discussion on the relative values of puts versus double inverse etf's.

I ran some calculations yesterday that indicated that a double inverse etf offered far more value than a simple put. This appeared odd to me as I am naturally sceptical of any free lunch.

I don't see what's wrong with using a percentage of existing profit to lock in that profit. It works in business so why not the market?

I shouldn't have mentioned reasons like QE2 - it has just muddied the water.

BY way of example........ having owned SLV from 28 to 33 I am happy of course. A 33 put option would lock in that profit, for a cost of about 10%.

On the other hand, a call option in the double inverse ETF ZSL bought at the same time (SLV 33) costs a lot less than the put option, and has unlimited upside, so if SLV went down to 20, ZSL would be up at 100 and showing a huge gain that would more than offset the losses in the underlying (which I own).

So the double inverse etf appears to offer more bangs per buck.

Or does it?

 

[anley]

I don't see what's wrong with using a percentage of existing profit to lock in that profit. It works in business so why not the market?

Because there's no guarantee you will lock in any profits. Buy the puts and if Silver stays the same price the puts will expire worthless so deal loses money versus not buying the puts.

Or buy the puts but the market drifts lower and again the deal loses money.

In such a situation the best and cheapest 'hedge' is to cover some of the ETF.

 

[funkyronster]

I appreciate your standing on the forum, compared with mine, but I don't agree.

In both of your put buying examples, you miss the point. And the second one is just plain wrong. If you buy the puts and the stock drifts lower, you are guaranteed exit at the strike of the put, assuming you bought ATM or ITM.

Of course the deal loses money if the stock goes sideways or up ....... but you were covered. Same as house insurance.

I don't understand your last sentence - cover some of the etf .... ??