Recently I started thinking that it’s a good idea to add short positions (on individual stocks or call options) to one’s portfolio. Then you can win if either the short thesis turns out to be correct (e.g., the company really is faking its profits), or the market tanks as a whole and the short positions act as a hedge. I wrote about some ways to find short ideas in a recent comment.
Question for the audience: do you know of a good way to measure the worst case correlation?
Not sure if this is the best way, but I’ve just been looking at the drawdown percentage from the Feb top to the March bottom of each asset.
I have changed my mind about shorting stocks and especially call options. The problem is that sometimes a stock I shorted rises sharply on significant or insignificant news (which I didn’t notice myself until the price already shot up a lot), and I get very worried that maybe it’s the next Tesla and will keep rising and wipe out all or a significant fraction of my net worth, and so I panic buy the stock/options to close out the short position. Then a few days later people realize that the news wasn’t that significant and the stock falls again. Other than really exceptional circumstances like the recent Kodak situation, perhaps it’s best to leave shorting to professionals who can follow the news constantly and have a large enough equity cushion that they can ride out any short-term spikes in the stock price. I think my short portfolio is still showing an overall profit, but it’s just not worth the psychological stress involved and the constant attention that has to be paid.
Recently I started thinking that it’s a good idea to add short positions (on individual stocks or call options) to one’s portfolio. Then you can win if either the short thesis turns out to be correct (e.g., the company really is faking its profits), or the market tanks as a whole and the short positions act as a hedge. I wrote about some ways to find short ideas in a recent comment.
Not sure if this is the best way, but I’ve just been looking at the drawdown percentage from the Feb top to the March bottom of each asset.
I have changed my mind about shorting stocks and especially call options. The problem is that sometimes a stock I shorted rises sharply on significant or insignificant news (which I didn’t notice myself until the price already shot up a lot), and I get very worried that maybe it’s the next Tesla and will keep rising and wipe out all or a significant fraction of my net worth, and so I panic buy the stock/options to close out the short position. Then a few days later people realize that the news wasn’t that significant and the stock falls again. Other than really exceptional circumstances like the recent Kodak situation, perhaps it’s best to leave shorting to professionals who can follow the news constantly and have a large enough equity cushion that they can ride out any short-term spikes in the stock price. I think my short portfolio is still showing an overall profit, but it’s just not worth the psychological stress involved and the constant attention that has to be paid.