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Sunday, August 21, 2011

Stock Market: Hedge Your Positions with Apple Computer (AAPL)

On July 27, the stock market started its shift to the downside. The week of August 15 fueled the doubt in the economy and where we stand. Market prices tumbled and seem to be in a free fall. The gloom and doom prophets are back and the sky is falling.

The facts are: We just concluded a great earnings season with positive outlook of most of the major US companies. However, all of this seems to be forgotten. If the USA is rated AAA or AA+ does not make a difference in anything. It was just a political act and the world is shaking.

When will we come back to reality?

This is a key question. When fear takes over, a “chicken-little” mentality dominates and trading the markets day by day, holding few to no overnight positions is the best to do. Another alternative is to hedge current positions.

How can a private investor hedge their funds?

There are many ways and the easiest is to sell Emini S&P 500 Futures Contracts in relation to shares held. One of those contracts is in relation to about $56,000 account holdings in stocks. Therefore, if an account holder of $100,000 in stocks sells two Emini S&P 500 Futures, the account is entirely protected and even has 12% participation in favor of a downside move.

For this form of protection, the account holder needs to have about $12,000 of margin available, to sell two S&P 500 contracts.

What happens if the market goes up?

The money, which will be gained in the asset-account, will balance the losses of the hedging account, making the cross account balance equal.
More often than not, hedging can occur in the same account where the assets are held, which makes everything much more easy.

What happens if the markets continue to fall?

The account that holds the shares will lose money and the account that holds the two Emini S&P 500 contracts sold, will gain value, making the cross account balances equal again, without the need to sell all assets.

How can I liquidate the Futures contract?

Emini Futures contracts of the S&P 500 are traded around the clock (with little breaks) and so they can be initiated or liquidated at any time. Costs for buying and selling a futures contract range from $4 to $50, depending on how they are engaged: Online or with a broker.

How do know when the market turn back to the upside?

The golden rule is: When a higher high and a higher low is made.

Are there early market direction indicators?

At the moment, AAPL is the most powerful company in the Stock market. If the price of Apple Computer shares rises, the market follows and vice versa. Hence, the AAPL share development can be used as a hedge indicator.
How can a private investor make money when the markets fall without taking an uncontrollable risk?

There are many ways to participate on a downside move and it would go too far trying to explain those so we will just give a summary:

- Engaging into option positions that participate from a downside move.
- Selling Futures contracts.
- Buying ETF’s, which are inverse to the market (they gain value if markets drop).
- Shorting stocks.
Prior to applying those methods, we highly recommend a sound education to fully understand those trading methods and their implications. NeverLossTrading is a premier institution, teaching those methods in great detail and with fantastic documentation.

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