Q&A by Don Bright
TO HEDGE OR NOT TO HEDGE
In this month’s column, Rob Friesen, president & COO of Bright Trading, will be filling in for Don Bright.
In keeping with our discussion last month on advanced trading tools, let’s further explore hedged strategies. This time, we’ll focus on types of strategies and setups using a hedge. A hedge implies a long or short that is protecting the opposite position.
Many of the trades discussed here can be implemented as a crutch trade, which is a trade that is started without initially using the hedge. The hedge can be implemented as required. This gives you something to lean on (that is, a crutch) as a way of protecting the trade and buying yourself time. Once hedged, the trade changes from absolute performance to relative performance, that is, the relative change between the two stocks rather than up or down movement of the first stock. You could have a scenario where you purchase a stock, the trade starts going bad, you hedge it, and then the spread between the two changes in your favor and instead of the original loss, you pull a profit out of it. Keeping that initial loss to a minimum is preferable. You have heard the phrase when in doubt, get out. Why not substitute that action for when in doubt, hedge the trade?