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Hedge vs Government
Inverse ETF (SKF) & Option (SKFJA)
vs Financial Sector (XLF)
Total Gain +304% vs -22%
Daily--Real & Hypothetical--Mostly USA ETFs Portfolio
17 Weeks March 24--July 18, 2008
See Comments below
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27skf
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This is a true story. There are three good lessons.
1- The superb value of hedging in uncertain times.
2- Targeted government intervention is extremely powerful.
3- What to do when the two collide.
Hedging and me.
My hedging is intermittent. On March 24th, the market was doing badly (SPY in the chart above). The Financial sector (XLF) was doing worse, a lot worse.
I include SPY in the chart for comparison. That's the tradeable ETF which tracks the S&P500. It will figure in lessons 2 and 3.
At that time, I decided to increase my existing hedges. I determined that the Financial sector was the best candidate to sell short. This was on March 24, the beginning of the chart.
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The red curve is both inverse to the brown financials curve and moves at twice the velocity because it is leveraged two to one. But it is not a short sale because I am buying long SKF (an ETF which is constructed to act like a short sale, leveraged).
If Financials go down 20%, the value of SKF is designed to go up 40%.
I bought the red curve on March 24. I purchased October 2008 $105 Call options (SKFJA) at $22 per contract.
Let us see what happens next >>
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