Regular Readers / Tweet Followers, will probably know I have some Huge FTSE100 Short Positions running which I put on earlier in the Year when Markets went quite ugly and caught everyone by surprise. Sadly my timing here was atrocious and Sods Law meant that the Markets rallied strongly since that malaise and this has been a real pain for me - it really was the worst possible scenario that could have played out.
Anyway, the whole logic of a Hedge is that if the Markets fall you are protected but if the Markets rise, then the gains on Long Positions should offset the Losses on the Short Positions - so in effect you are ‘Market Neutral’ - like going to Cash (I find this sort of Hedging quicker, easier, cheaper and more effective than selling Long Positions that I want to keep). This of course depends on the size of the Shorts and it is very hard (arguably impossible) to get it exactly right - if anything, experience tells me it is better to undersize the Shorts relative to the Longs. As it happens, my Shorts are probably a bit too big and when the Markets have risen for much of this year, my Longs have failed to offset the Losses on the Shorts - although it is noticeable that in recent weeks this has changed and my Longs are performing a lot better.
I have had an awful start to the year and my Portfolio is really not doing very well at all, however, I would only blame the FTSE100 Shorts for about a third of the overall Losses on the Portfolio - the far bigger culprit has been Profit Warnings on several of my really big Holdings like SPRP, TSTL, ETO and falls on Stocks like TTR for no particular reason. When I put the Shorts on earlier in the year, it was really to protect myself from Downside Risk in the Markets but I had as part of the reasoning the view that this would be a very difficult year because we had the Brexit Vote on the 23rd June and later in the year there is the US Presidential Election where it looks like Trumpy could easily get elected - the Markets might really take fright at this. So my thinking was partly that if the Markets rose after the Sell-off at the start of the year, then I would get plenty of chances to unwind the Shorts later in the year before the Brexit Vote or perhaps in the Autumn, prior to the US Elections and when we usually get Sell-offs anyway. The beauty of Shorts at the moment is that Interest Rates are very low so it is not hugely expensive to let them run - although of course it would have been far preferable if I could have closed them earlier in the year. The raw fact is that Hedging for me is all about protecting my Portfolio from Downside Risk - funnily enough I have a Blog Draft in the pipeline which covers the subject of Downside Risk (and ways to avoid it) in depth, which should appear in coming weeks. Anyway, we are where we are and all that, so I wanted to do a ‘Scenario Plan’ for how I handle my Shorts in the run-up to the Brexit Vote on June 23rd, which is about 3 weeks away now. To this end, below I have outlined some possible Scenarios and the Actions I can take. As a general point, doing this kind of planning can be a very useful exercise for all sorts of Investing/Trading Decisions and it can be most beneficial to think about these things in advance when you are calm and unruffled, rather than in the heated emotions of the thick of battle. Scenario 1 - FTSE100 falls significantly prior to the Brexit Vote This is my most preferred Scenario and probably the most likely. It is very hard to see Markets continuing to rise when the ‘Remain’ Campaign being run by the Established Government of the UK will be keeping up a constant drumbeat of negative Scare Stories if we were to leave the EU - this should scare Market Participants into selling Stocks and/or not Buying unless Prices are very low. This will in effect be a ‘Buyers Strike’ I expect where there will be very little ‘Buying Pressure’ but plenty of ‘Selling Pressure‘. In addition, June is the 2nd worst Month of the Year on average and the Summer is notoriously a poor time for Markets - it is hard to see the FTSE100 making much headway and there is a lot of Strong Resistance up above. On the other hand, the Markets have been surprisingly resilient and maybe they will do the unexpected - but I think this is very unlikely.
The Approaches outlined in the Bullet Points above are unfortunately contradictory and this is a problem. The idea of a ‘Scenario Plan’ is that all the thinking is done up front and it is very precise and instructive so that the Emotional part of the Brain doesn’t get overly exercised at the time a Trading Decision needs to be made and it is more of a Robotic Task or following pre-determined Instructions. At the time of writing this Blog, I have not resolved this contradiction but it is critical that I decide the precise Bullet Point I will follow when we get into the Heat of Battle in the last week of the Vote. The second Bullet Point is imperfect because it is allowing for too much judgement - therefore I am leaning to just sticking to the Approach outlined in the first Bullet Point. To some extent any Decision will be affected by the degree of any Falls - if the Falls are big, then I would be more likely to Close out all of the Shorts (because a lot of FEAR and worry will be priced in); it the Falls are pretty meagre, then it might make sense to keep a bit of Insurance in case there are big falls after the Vote. In the early days of June, if Markets start to sell off as I think is most likely, I will try to add more FTSE100 Shorts to take advantage and to raise my Average Price (opposite to ‘Averaging Down’ on Long Positions) - but I will use Stoplosses on any such new Shorts to avoid the problems of getting my Shorts over-sized if Markets continue to rise. Scenario 2 - FTSE100 rises prior to the Brexit Vote This would be my least desired Scenario - rising Markets will cause me a lot more pain and inconvenience. As mentioned in Scenario 1 above, I think it is very unlikely that Markets can rise leading up to the Brexit Vote - unless of course the ‘Remain’ Campaign with the Government and Davos Elites continue with their very effective Propaganda and scare the Masses into staying with an EU which is very much against their interests, and that this gets reflected into Polls in the days before the Vote in such a way that the Outcome is pretty much clear in advance to everyone.
Scenario 3 - Markets stay flat This is very unlikely, but if it happens, then really the Actions for Scenario 2 where the Markets rise will apply. Spreadbet Margin Requirements Something else to bear in mind and to plan for is that Spreadbetting Companies may well change their Margin Deposit Requirements as we get near the Brexit Vote - this will particularly apply for both Long and Short Positions that remain open before and through the Brexit Vote on Thursday 23rd June 2016 (I understand that we may not know the Result until later in the Weekend). All Spreadbetting Firms will probably have their own Policies here, but I know that igIndex are going to double their Margin Requirement on Index Bets - so I will need to make sure I have plenty of Free Cash sloshing about in my Spreadbetting Account to cover any such changes. On a related point, whatever Scenarios play out, it is a very good idea to make sure Cash Balances in Spreadbet Accounts are very high as we go into the Brexit Vote period - Markets could be extremely volatile. Anyway, that’s given plenty to think about in the coming weeks, I need to sort that contradiction out that I discussed earlier and make a firm decision. Cheers, WD You can read my substantial Blog on Hedging here: http://wheeliedealer.weebly.com/blog/topiary-time-aka-all-you-ever-wanted-to-know-about-hedging-but-were-afraid-to-ask And this one on Why Prices move might be a useful read: http://wheeliedealer.weebly.com/blog/why-do-share-prices-rise-and-fall
8 Comments
catflap
1/6/2016 10:24:27 pm
Its making my head hurt computating all the possibilities laid out above.
Reply
WheelieDealer
4/6/2016 12:32:02 am
Hi catflap, I agree with your thoughts - I expect a Rally whatever the outcome as some Uncertainty gets removed - just that a 'Leave' Rally would be less impressive. Interesting point about Cameron - the 'Leave' proponents like Gove are saying he will stay as PM but I don't think they really believe that. Not sure how Markets would take Cameron leaving though - I guess it depends on who likely successors are.
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Father ted
2/6/2016 08:59:55 am
Enjoyed the blog WD, you do put in a lot of work! Well done.
Reply
WheelieDealer
4/6/2016 12:37:36 am
Hi Father Ted, thanks for the kind comments - great to hear you find the stuff enjoyable - luckily for me it isn't too much hard work as I pace myself and it is very useful for me to think about these things for my Portfolio.
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Tony Cox
2/6/2016 09:27:09 am
Well l can only admire your dedication,seems the more options you have given yourself the more options there are ! My reservation on your hedging process,and reason l've gone to cash,is the need for your hedge, ftse 100, to move in sync with your porty.Old market axiom 'Trading is simple but it ain't easy'
Reply
WheelieDealer
4/6/2016 12:43:48 am
Hi Tony, huge thanks for the kind comments at the bottom about how you find the Blog and website worth reading - I really set this all up to help the Newbies and it is quite an honour that experienced practitioners like yourself also find it worthwhile.
Reply
Jon H
2/6/2016 12:19:49 pm
After all that I think I'm going to do nothing. Thanks for the insights. Hope you win
Reply
WheelieDealer
4/6/2016 12:45:50 am
Hi Jon, I hope I haven't terrified you !! You can safely sit on the sidelines and see how it plays out for me - from my viewpoint it is not really about 'Winning' - it is more about NOT LOSING.
Reply
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