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How do you hedge your single stock positions?
Old 02-14-2014, 03:57 PM   #1
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How do you hedge your single stock positions?

I am 58 and DW is 52 1/2. We have about 1/3 of our portfolio in single stocks. Too high, I know. Some are acquired thru ESPP; some were simply bought over the years. We are not retired yet. Most of these holdings have long term capital gain, so we certainly want to hold on until our tax rate drops to below 15% before we sell. We hope to ER soon.

2 stocks are in 220K area each
2 stocks are in 120K area each
few in 20K area each

Therein lies the dilemma. How do you hold on to the gains before the next dip (or crash)?

Over the years, I tried some hedge strategies: buying puts, selling covered calls, creating collar positions. All seem to be losing strategies.

Holding on without protection and leaving me naked down below, seems to be risky also.

So, what do you do to hedge your single stocks positions?
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Old 02-14-2014, 04:01 PM   #2
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I do so a couple of ways. First, I set limits. I won't buy into a position over a certain percentage of the portfolio (5 or 6% for a single position, tops) and I force myself to sell or hedge if it rises over another max amount (8 to maybe 10% absolute tops). My limits have come down over the years as I have gotten closer to my goal. Second, I try to diversify my individual names. 1/3 of your portfolio in a single sector is a lot scarier than 1/3 of your portfolio in 10 stocks in 7 different sectors.
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Old 02-14-2014, 04:29 PM   #3
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I do so a couple of ways. First, I set limits. I won't buy into a position over a certain percentage of the portfolio (5 or 6% for a single position, tops) and I force myself to sell or hedge if it rises over another max amount (8 to maybe 10% absolute tops). My limits have come down over the years as I have gotten closer to my goal. Second, I try to diversify my individual names. 1/3 of your portfolio in a single sector is a lot scarier than 1/3 of your portfolio in 10 stocks in 7 different sectors.
Brewer, are these limits expressed as % of invested assets, or % of equities?

Ha
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Old 02-14-2014, 04:37 PM   #4
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I do so a couple of ways. First, I set limits. I won't buy into a position over a certain percentage of the portfolio (5 or 6% for a single position, tops) and I force myself to sell or hedge if it rises over another max amount (8 to maybe 10% absolute tops). My limits have come down over the years as I have gotten closer to my goal. Second, I try to diversify my individual names. 1/3 of your portfolio in a single sector is a lot scarier than 1/3 of your portfolio in 10 stocks in 7 different sectors.
That's what I do as well. Except for DW's company stock (>20% of NW at this point), I try to keep each position under 5% of equities and I spread the money around various sectors. Still, I am sitting on huge LTCGs. While I would like to lighten up on equities, I won't because I would still be required to pay almost 34% in LTCG taxes (23.8% for federal, 10.3% for CA). I don't hedge any of those positions.
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Old 02-14-2014, 04:45 PM   #5
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I do so a couple of ways. First, I set limits. I won't buy into a position over a certain percentage of the portfolio (5 or 6% for a single position, tops) and I force myself to sell or hedge if it rises over another max amount (8 to maybe 10% absolute tops). My limits have come down over the years as I have gotten closer to my goal. Second, I try to diversify my individual names. 1/3 of your portfolio in a single sector is a lot scarier than 1/3 of your portfolio in 10 stocks in 7 different sectors.
My 4 largest single stock holdings happen to be in 4 different sectors, though I still feel "naked".

I guess, when markets goes down, as long as the rate of their decrease is not greater than the overall market, I am no worse than holding index funds.
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Old 02-14-2014, 04:46 PM   #6
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As you probably know from your past experience, puts on individual stocks can be quite expensive. If your portfolio is reasonably diversified, you can hedge the market risk by buying puts on the S&P 500 (SPY or SPX), which are considerably cheaper than puts on individual stocks - probably about half the cost on average. If you're a good stock picker and your stocks outperform the market, your alpha will defray part of the cost of your market puts.
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Old 02-14-2014, 05:18 PM   #7
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I don't hedge, I just ride it out.

The best way to protect yourself is put options. Whether it is worth the cost depends on how willing you are to suffer losses. IMO, if losing 50% would impair your FIRE, it may be worth it.
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Old 02-14-2014, 07:16 PM   #8
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I use cover calls as mechanism to keep my single stock positions from being too concentrated.

I generally write slightly out of the money calls and always make sure that I am getting at least 15% annualized return, and typically it is 20+% if the stock is exercised. The downside risk protection is relatively modest. Likewise in market like last year you do lose upside.

Still I think it is important to keep you eye on the end goal. A 15%+ return is way more than most of us need to maintain a full funded retirement. Keeping individual stock positions at no more than 5% normal case, and no more than 10% exceptional case (company stock lots of stock option) is worth losing some upside.
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Old 02-14-2014, 07:24 PM   #9
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I don't hedge, I just ride it out.

The best way to protect yourself is put options. Whether it is worth the cost depends on how willing you are to suffer losses. IMO, if losing 50% would impair your FIRE, it may be worth it.
Some of you mention buying puts. Protective puts are like insurance, some say. You keep paying the premium but you have to be right both in timing and direction. This turns out to be harder than I thought. So, I kind of gave it up.
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Old 02-14-2014, 07:32 PM   #10
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I use cover calls as mechanism to keep my single stock positions from being too concentrated.

I generally write slightly out of the money calls and always make sure that I am getting at least 15% annualized return, and typically it is 20+% if the stock is exercised. The downside risk protection is relatively modest. Likewise in market like last year you do lose upside.

Still I think it is important to keep you eye on the end goal. A 15%+ return is way more than most of us need to maintain a full funded retirement. Keeping individual stock positions at no more than 5% normal case, and no more than 10% exceptional case (company stock lots of stock option) is worth losing some upside.
I kind of gave up on covered calls for my long term holdings as well. I once owned a high flying stock, and sold a 30% OTM call thinking I would be satisfiled with 30% gain. The stock began to take off. I rolled out and up few times until the call is so deep in the money, and there is no more equal money calls to roll.

I should have cut the loss and buy back the call, but I did not monitor the options (the w*rk got in the way), and saw my stock got called away. I received a total 100% gain. Not bad. But the stock elevated into a 7 bagger.

I am still kicking my behind till this day....
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Old 02-14-2014, 07:51 PM   #11
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I should have cut the loss and buy back the call, but I did not monitor the options (the w*rk got in the way), and saw my stock got called away. I received a total 100% gain. Not bad. But the stock elevated into a 7 bagger.

I am still kicking my behind till this day....
100% gain over how long a period of time, anything under 6 years you should be happy.

Bulls make money, Bears make money, pigs get slaughtered.
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Old 02-14-2014, 08:00 PM   #12
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Brewer, are these limits expressed as % of invested assets, or % of equities?

Ha
I do it as a percentage of portfolio and I apply the same limits to junk bond issuers as I do to equities. What I really want to limit is how badly I could get hurt by making a mistake in my stock picking. The limits have really helped me with my sell discipline as well. I also set at least an initial price at which I would start selling at the time I buy each individual security. Sometimes this is easy (par or the call price on a bond), sometimes this is squishy (volatile equities with big potential upside), but going through the exercise forces me to think ahead to what happens if I am successful and it helps take some of the emotion away from making a sell decision down the road.

I use covered calls in limited size mostly when something has run and I am ready to start taking profits.
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Old 02-15-2014, 03:33 PM   #13
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Therein lies the dilemma. How do you hold on to the gains?
I have a relative whom inhereted a position in an oil stock. He is now in his 80's. His financial adviser "forbid" him to sell any of it because the capital gains would be through the roof. The adviser's advice was to pass it along to his heirs.

Somebody has gotta sell someday. All in all, nice problem to have. My thought is - don't hold too long.
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