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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: OT: Went Long 100sh of UNG Date: 3/22/2012 3:30 PM
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I just complicated my investment life, and I probably made the mistake of confusing 'low price' with 'excessively discounted'. But I'm now long a round lot of natural gas (via UNG). My (possible) escape hatch is that there a 3x inverse, GASX, I could use to hedge the position. [Opps. Less than 5 minutes into my less than felicitous or well-motivated entry, prices have already moved against me. But I'm going to give this trade some wiggle room and not go into panic mode just yet.]

Behind this trade (and my two tiny shorts) is this thought. As noted Yale economist G W Bush once said of the American economy, "This sucker's going down." If that is the case, then there's lots of ways to deal with it. One is sheer panic and doing nothing. The other is to trade it. If the latter path is chosen, then that could be done in one of three ways: long-side, short-side, or SAR. A true trader should be indifferent to market side. But, in fact, few trade from both sides with equal ease, and very few retail investors ever short at all.

I'm massively long bonds, but I can't find much more I'd be willing to buy. So I need a new gig, and one that diversifies at least a portion of my risks. UNG isn't it. But shorts are. So that's where I'm going to put my energies. Direxion has a bunch of 3x inverses worth exploring, some of which (as of an hour ago) were up as much as 11% on the day. Much of the gains are from gapping at the opening, not intra-day moves, which means I'm going to have to be willing to carry positions overnight. But I carry my bond positions over night without giving it a second thought. So I should also be willing to put on stock and ETF trades that risk adverse inter-day moves.

If portfolio resources are distributed 4-3-2-1 from 'defensive' to 'speculative', then no matter how badly a speculative position moves against one's entry (provided it isn't leveraged), the damage should be tolerable. Bonds, as I do the gig, make up 90% of my present portfolio. The remaining 10%, my cash, isn't working as hard as it should be. So I'm going to spend it on portfolio insurance, which could be done in lots of ways, one of which would be puts, especially LEAPS, tied to one's more speculative bond holdings. Another would be shorts against specific bond issuers or against broad asset-classes or markets. Right now, I'm running a couple of options experiments and, predictably, I’m losing money on them (just as one "loses money” on the fire insurance one buys for one's house if the house doesn't burn down that year). But from day one, I was in the money on my broad shorts, and I really do think that ‘down’ is where most securities prices are headed for all of the reasons argued by able commentators like John Mauldin (too much debt and the lack of will, anywhere in the world, to cut public or private spending).

I’ll see what happens. But at this point, my guess is that I’ve bought my last bond for the year (36 new positions so far, in ones and fives, offering an average return of 14.5% if nothing blows up, which won’t be the case) and that all new securities positions will be small, one-at-a-time trading-experiments until I either "get it right" or bench myself for having to admit that I’m wasting too much money. If 2%-5% of AUM isn't being "wasted" each year, then not enough R&D is being done, and the necessary learning isn't happening. Making easy money teaches you absolutely nothing. It's your mistakes that teach best *provided* you learn from them. (IMHO, 'natch.)
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