Don’t run for the exits yet.  But cover your precious Lizard Hindsides.

music selection:  “Let It Burn” — Volbeat

Today, I’m doing a little strategy review.  There is some volatility in the markets at the moment, driven by global central banks and the trade war.  This type of volatility is normal during a “melt-up”.  I expect a blow off top in the next 18 months but also MORE volatility along the way.  Now is the time to be long but also be hedged.

My core long positions are still in place.  These are chosen primarily for income.  I currently have 98.86% of my annual budget covered (and quite a lot more of my on pace spending for the  year). I also keep about 40% of my primary trading account in bonds and bond like instruments.  If you are going to trade the markets, it is essential to not be dependent on frequent trades to meet the bills.  Sometimes the best, really only trade, is NO trade.  You have to have the flexibility to just squat on your Lizard Tail and wait for fat pitches.  Forced trading is a recipe for disaster.

Next, I have tilted the 60% of my main account that I trade to a market neutral strategy.  That is composed of three trades per week, one bearish, one bullish, and one market neutral.  The bull call spreads and bear put spreads are always in the money for added safety.  I want to make good money in nearly any market environment.  The final market neutral trade is a calendar spread that profits from time decay as shares remain stable.

A third leg I haven’t talked much about here is hedging.  I have several long dated put options open on companies that are market challenged and often plagued by excessive debt.  They will be the first to take a dive when the big one finally arrives.  My long puts hedge my long exposure and performed well during the recent volatility.  I have long put positions in SC, GM, F, HTZ, THC, ALLY, COF, T, MCK, CONN, and CAKE.  For certain, these small positions have been a drag on the portfolio.  That is what put insurance does until suddenly it pays off BIG.  Consider having some long dated puts or even some direct shorts to hedge your exposure.

Finally, I want to remind the Lizard Army that trailing stops are your friend in this kind of market.  They ensure your winners run while mercilessly cutting your losers.  The result is ultimately a portfolio composed primarily of winners.  Resist the urge to “take your profits” and “hold till it recovers”.  That strategy leads to a portfolio composed primarily of losers.  Not the goal!  You can always tighten your stops from 25% trailing to 15% trailing as the market rallies to protect profits.

Devour your prey raptors!

Stay long – stay hedged

Never miss another opportunity to devour prey!

2 thoughts on “Stay long – stay hedged

  • August 8, 2019 at 8:57 pm

    Interesting. You’re hedging with puts for companies that are different than your long positions, plus using stop loss orders on the long positions. The risk scenarios would be:

    1) Company-specific risks or industry-specific risks hit your long positions but not your shorts.

    2) Stop loss orders are triggered and markets promptly go back up, leaving you holding cash and rapidly depreciating puts.

    I’d be more concerned about the latter risk, but as I understand it you are planning to sell the puts and dive into discounted bonds at that point in the cycle, correct?

    • August 8, 2019 at 11:39 pm

      Raising cash is fine by me as I want to pivot into distressed bonds when the cycle rolls over. Trailing stops always run the risk of getting stopped out “too earlY” but most people would do well to follow them. It is insurance against letting your primal psychology make you do stupid things.


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