TH's buy & hedge system

[Trembling Hand]

I have a system that is longer term than my normal 1-5 min trading. Thought I might post the trading here as an ongoing record. I'll base it on a 1 mil paper trading account for this example.

Basic idea is a swing trading setup trading ASX 20 stocks but instead of selling to lock in profits and then triggering CGT or income tax the idea is to place hedges until another buy signal is triggered on the same stocks or the underlying index. Then removing the hedge to hopefully gain more upside.

No margin on the stocks but used for oppies & futs to gain the hedge positions. Will also add extra exposure from time to time in each direction if signals line up. For example if I was full invested at the recent XJO 5000 mark my system would of given a signal to hedge. Because my super duper never fail indicator gave such a "good" signal I would of went short 1.2 times my stock holding as an example.

First trades in forum tradition of all buy and holders is a hindsight from yesterday. 50% of funds invested for first trade.

 

[MRC & Co]

Sounds like a global macro strategy mate!

 

[Trembling Hand]

Sounds like a global macro strategy mate!

You never know where a simple idea could end.

 

[tech/a]

So when do you close out a position --- 12 mths?
You just keep adding positions until your capital is used?
At some point you'll hedge each trade with oppies or just the Fut blanket?
500K how many contracts ---- 4?

 

[Trembling Hand]

So when do you close out a position --- 12 mths?
You just keep adding positions until your capital is used?

I don't. Its a twist on the buy and hold. Aim being the best of all three worlds franked div, Cap growth, and protected down side.

Just like you read in the ads.

Of course if the outlook for a stock becomes terminal then that would change things.

At some point you'll hedge each trade with oppies or just the Fut blanket?
500K how many contracts ---- 4?

Each SPI at this level is around $115,000. So 4 would cover $460,000 holdings here. But of course the SPI isn't the perfect hedge but at the same time the alchemist rob you on the options and they are very expensive to trade as well so its a game of coin toss. futs IMO are the better instrument for what I'm trying to do here.

 

[brty]

TH,

You are a funny character taking yesterday's afternoon low at ~2.30 as the starting point, your hindsight comment had me in stiches.

Why are you doing this?? Have you put real money into this?? What were your starting parameters to buy yesterday?? What parameters do you use to decide when to hedge??

Glad to see you posting again.

brty

 

[Trembling Hand]

TH,

You are a funny character taking yesterday's afternoon low at ~2.30 as the starting point, your hindsight comment had me in stiches.

glad you liked it but they are real trades from yesterday. (real paper ones)

Why are you doing this?? Have you put real money into this?? What were your starting parameters to buy yesterday?? What parameters do you use to decide when to hedge??

I been using this approach since early 08 in a far looser way but have been working on turning it into something bigger for a few months. As for the system its signals are derived from the index not the stocks themselves and a couple of indicators I've been using forever. They are not a price based ones like RSI, MACD etc More of a market internals type thingo.

The actual stocks setups do not matter as long as they are showing signs of swinging aound with the market.

The buy yesterday was actually a buy signal from Monday morning.

 

[MRC & Co]

Yeh, I know the exact super duper indicators your talking about and strategy your going for here, I think it will work well, not the best returns, but consistent over the long-run and little time required!

A good thing to have in the background of intraday trading considering most funds sit there idle as intraday is nearly all leverage!

 

[RazzaDazzla]

Yeh, I know the exact super duper indicators your talking about and strategy your going for here, I think it will work well, not the best returns, but consistent over the long-run and little time required!

A good thing to have in the background of intraday trading considering most funds sit there idle as intraday is nearly all leverage!

TH, are you able to share your super duper non price indicator? Just curious.

With your hedging, obviously it will be hard to hedge exactly 100% of the value of your shares. So would you be inclined to over or under hedge?

Will you use options at all for hedging? or simpler and more transparent to just use SPI over the whole lot?

Is this something you can backtest? or because of the many facets involved the only way to test is paper trading into the future?

Looking forward to see how this develops.

 

[Trembling Hand]

TH, are you able to share your super duper non price indicator? Just curious.

A simple version is already out there for anyone willing to investigate a little.

With your hedging, obviously it will be hard to hedge exactly 100% of the value of your shares. So would you be inclined to over or under hedge?

Will depend on the situation. And that being mostly discretionary. Certainly will add a little leverage both ways given enough ducks lining up.

Will you use options at all for hedging? or simpler and more transparent to just use SPI over the whole lot?

Only if for whatever reason I believe an individual share enters a period where it will significantly delink from the index performance. But options from my experience are actually a very very costly way to hedge. If, like here, you have a reasonable spread of holdings then poorer performers should be helped by the better performers, in theory

Is this something you can backtest? or because of the many facets involved the only way to test is paper trading into the future?

Its still very much a discretionary decision as to what signals are used for putting on the hedging process.

 

[Ageo]

I enjoy reading your posts TH as you like to think outside the box. So in short what are you trying to achieve with this? Short and long term hedged gains??

 

[Trembling Hand]

I enjoy reading your posts TH as you like to think outside the box. So in short what are you trying to achieve with this?

I'm looking at the indexes all day long and mostly have a reasonable handle on where they are going and when but my trading clearly misses profiting from the bigger swings.

So this is long term growth away from my trading capital yet not adding a heap of extra work by falling into the mugs game of punting on ASX stocks :. Something I can see as very scalable too.

 

[wayneL]

...at the same time the alchemist rob you on the options and they are very expensive to trade as well so its a game of coin toss.

Don't discard alchemy.

Lead can truly be turned to gold.

(Caveat - Gold can also be turned to lead)

 

[Trembling Hand]

Don't discard alchemy.

Lead can truly be turned to gold.

(Caveat - Gold can also be turned to lead)

Oh I agree but I think you would agree too that a straight option position to hedge what could be anything from a -4% to -10% expected index move is not all the sunshine and happiness that option spruikers would have you believe??

 

[wayneL]

Oh I agree but I think you would agree too that a straight option position to hedge what could be anything from a -4% to -10% expected index move is not all the sunshine and happiness that option spruikers would have you believe??

Yes, ignore spruikers. (slap with a wet fish etc)

But given a certain market expectation the alchemist position should certainly be considered alongside a straight out blacksmith's (linear) hedge.

Certainly the alchemist has more things that might go wrong, but also more things that might go right.

Alchemy offers more choices.

 

[Naked shorts]

Basic idea is a swing trading setup trading ASX 20 stocks but instead of selling to lock in profits and then triggering CGT or income tax the idea is to place hedges until another buy signal is triggered on the same stocks or the underlying index. Then removing the hedge to hopefully gain more upside.

Interesting idea, but why dont you just move to Switzerland, setup an offshore entity to do all you trading through at either, Liechtenstein, Channel islands, Cayman islands, Bermuda, The Behamas etc? Is Melbourne really that good?

 

[Trembling Hand]

Interesting idea, but why dont you just move to ........?

Why don't you?

 

[cutz]

Interesting idea TH,

With your buy and hold plus hedge system another idea could be to use XJO options as part of a collar strategy where you short out of the money calls and buy out of the money puts in the appropriate amounts, could work out to be zero cost.

I take it you’re using the top 20 stocks so you can mimic the ASX200 more cost effectively, problem is you seem to be using equal dollar amounts as opposed to weighted, not sure if the portfolio will move at the same rate as the index.

BTW, personally with collars I like to add further out strike long calls as so not to limit upside, effectively a backspread to the upside.

 

[Trembling Hand]

With your buy and hold plus hedge system another idea could be to use XJO options as part of a collar strategy where you short out of the money calls and buy out of the money puts in the appropriate amounts, could work out to be zero cost.

Yep I knew you option guys would be full of good advice for hedging. At the moment I haven't the time to investigate or play with them. But when I get to the time when I'm looking to put some in place maybe you guys can suggest actual examples alone with my simple SPI hedge to see how much better off the outcome would be?

I take it you’re using the top 20 stocks so you can mimic the ASX200 more cost effectively, problem is you seem to be using equal dollar amounts as opposed to weighted, not sure if the portfolio will move at the same rate as the index.

Yep fully aware of the problem between the weightings of the index and my holdings. May over time correct that. But maybe not. I don't want an index tracking portfolio. And although the hedging will not be matched 100% the other problem is that then I'm not all that sure I would be comfortable holding 20% of capital in BHP & RIO for example. Anther time when theory doesn't match practicality??

 

[Mistagear]

Hi,
I reckon I'm a better race car builder than I am a trader but one principle which stood up well when I was racing was the KISS method. If a component aint there it can't break.
So if you are a successful trader with your kick-ass indicator

"Because my super duper never fail indicator gave such a "good" signal I would of went short 1.2 times my stock holding as an example".

why wouldn't you simply reverse the position down and then use the extra profit to multiply at the bottom along with your exit capital to buy more shares, surely with any tax configuration you only pay a portion in tax so if you make more (which you would do) you get to keep more???.. and you would have more shares to boot
Why not leave the tax minimization tricks to people who don't have ability to trade each leg.
Fixes the problem of % holding in a single stock as well.

Just a thought from a non accountant .

Cheers, M