Don Wellenreite – Hedging Your Stock Portfolio

$29.00

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Don Wellenreite – Hedging Your Stock Portfolio

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The hedge preserves the edge.

If you hedge too much, you naturally dull the edge, so the challenge is to find a delicate equilibrium: How much risk are you willing to absorb in pursuit of a specific level of returns?

This is a leading investor concern. Last week, we recommended buying puts on the SPDR S&P 500 ETF Trust SPY-1.97%

to hedge a $500,000 stock portfolio against a near-term market decline. The column sparked an avalanche of e-mails and inquires from readers eager to learn how many puts to purchase to hedge their equity holdings.

IN ADDITION, THE RELEASE of minutes from the Federal Reserve’s policy-setting committee, indicating that the central bank is debating an early end to its easy-money policies, spooked some investors and sent the CBOE Volatility Index—the VIX, or market-fear gauge—surging higher in anticipation of a stock-market correction.

What is forex?

Quite simply, it’s the global market that allows one to trade two currencies against each other.

If you think one currency will be stronger versus the other, and you end up correct, then you can make a profit.

If you’ve ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet into the currency of the country you are visiting.

Foreign Exchange
You go up to the counter and notice a screen displaying different exchange rates for different currencies.

An exchange rate is the relative price of two currencies from two different countries.

You find “Japanese yen” and think to yourself, “WOW! My one dollar is worth 100 yen?! And I have ten dollars! I’m going to be rich!!!”
When you do this, you’ve essentially participated in the forex market!

You’ve exchanged one currency for another.

Or in forex trading terms, assuming you’re an American visiting Japan, you’ve sold dollars and bought yen.

Currency Exchange

Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have left over (Tokyo is expensive!) and notice the exchange rates have changed.

It’s these changes in the exchange rates that allow you to make money in the foreign exchange market.