It's Not Just The News

Hedging The Inevitable Is Sensible

So there we have it. The Federal Reserve has spoken, and Jerome Powell has seen his shadow. Looks like we’ll have another couple of months of uncertainty. The markets ran higher. I bought more March 2025 20 call options. I’m consistent. No guarantee of being right, but I’ll always stick with the plan. You should, too.

The Federal Reserve hasn’t cut rates by 50 basis points since 2008. Bidenomics is dead and Kamala is going to find it hard to play both sides of this coin. I am surprised that Powell acted in this manner and expect him to continue. He has a plan too.

Buy Low & Sell High

Sounds easy. It’s not, as listening, reading, and timing comes into play. Please keep in mind that hedging is an art. It utilizes a couple of percent of the overall total value of a portfolio. In other words, a very small percentage protects against the inevitable, as, without a doubt, uncertainty exists. Just how does that work?

The Middle East is on fire. War and battles exist, and more than likely, there is more to come. I do not know when that will happen. No one does so to protect against it all, long-call options, six months or more out in time, are deployed. Certainly, I am going to watch the WTI Crude Oil trade technically. I’m going to enter a hedge on the long side when the “herd” is dumping the commodity. They are usually wrong.

So I’m buying time, using long-term call options with the highest trading volume and open interest, with good-til-cancelled (“GTC”) orders strategically placed. Remember, the market makers need only supply a single options contract at their bid or ask price. Don’t let them take advantage of you with “market” orders. Fix your entry price and be patient. Patience works and, the best hedgers know it.

Pigs Get Slaughtered

I spoke about “greed” and wanted to emphasize that greed kills. As I was talking to an old friend, something came to mind that I forgot to mention. It sums it all up and will provide a better insight into knowing when to take your profits.

Bears make money. Bulls make money. Pigs get slaughtered. It is true, and the primary reason trailing stops are used. If the trend ramps up and runs in a winning direction, a trailing stop allows you to make larger profits. If the trend changes, you are going to get stopped out but you’ve locked in a profit.

I’m happy taking my piece out of the middle. Seldom will I buy at the lowest potential price and sell at the top. I’m not that good and neither are you. Don’t be greedy. Learn to take your piece out of the middle and you’ll avoid being slaughtered.

More than 40 years ago, Roger Waters realized the world was comprised of “pigs” that got in the way of how a better world could operate. Perhaps the song and “Animals” album has more meaning today. All things considered, this understanding sets itself apart from what exists in today’s world better than it did years ago. I find it reassuring that music gets better over time as people learn to appreciate its value. Many of you who are my age might remember attending a few Pink Floyd concerts over the years. I get a different message listening to their music today but whether today or years ago, pigs did not fit in anywhere in the world.