Making Money in Technology
After the Bubble, page 30

Hedging a Technology Portfolio

Through March 20, 2000, you wanted to be long in technology stocks. From March 20, 2000 almost until the present, simply being short was the winning position.

The point is that in these conditions a hedged portfolio performs worse than a “naked” portfolio—provided you correctly guessed the market direction. It’s even possible to have the worst of all worlds, in which your hedges backfire. In this scenario, the stocks you sell short go up, and the ones you are long go down. The point being that hedging brings its own risks:

• You may be subject to what amounts to an insurance premium cost taken off your portfolio performance

• You may pick the wrong vehicles as hedge instruments

That said, there are steps you can take to mitigate these risks. For example, buying LEAP puts (long-term options allowing you to sell, or “put” stock at a specified price) rather than directly selling stock short makes it less likely that the hedge will significantly “bite” you. If the stock goes up, your loss is limited to the cost of the option (as opposed to selling short, where you have a theoretically infinite exposure).

In a choppy market like we have today, with great volatility in both directions, it’s great to hedge a technology portfolio so as not to be completely exposed to market directions. You can try to short those “amazing hulks” and “former glories” while tucking away the technologically truly great “goodies.”

Continued next page

Page 21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30 | More | Beginning

Home | Barticles | Blogs | Books | Services | FAQ | Contact
© Braintique.com. All rights reserved.