Can someone share their experiences with âtrading like a hedge fundâ techniquesâ¦? Similar to the videos below from the show Million Dollar Traders⦠<iframe width="560" height="315" src="http://www.youtube.com/embed/v6ciY8u04Kk" frameborder="0" allowfullscreen></iframe> <iframe width="560" height="315" src="http://www.youtube.com/embed/ML4ObTeYLhg" frameborder="0" allowfullscreen></iframe> <iframe width="560" height="315" src="http://www.youtube.com/embed/5Hk0lkrHBVk" frameborder="0" allowfullscreen></iframe> During the show contestants/traders were encouraged to build a âbookâ and to hedge their trades. What is the success rate using these techniquesâ¦? Generally, to make money wonât you have to be overweight and unhedged on at least some securities? If you complete cancel out risk how will you make moneyâ¦?
you dont completely cancel out risk. you cancel out the stuff that is difficult to predict (ie. direction)
You don't completely cancel out all the risk. You buy AAPL and short QQQ. If the whole market sells off or rallies then you won't make or lose money. But if AAPL rallies more than the market then you make money. That's hedging out the market risk and just keeping the single stock risk.
For about 90% of these guys (approx same % as retail), if they don't have order flow, or some sort of other (possibly illegal) information then they don't really have an edge and they are being:
you can't cancel out vola forecasting in neutral trading.. you'll find similar issues with calling direction in vola as you would direction of stock..... a real market making, dealer.. replicates with static equivalents. "synthetics". such that he is only making the cost of carry many times over on margin... and even then your speculating on interest rates... shorting a box has more margin requirements then going long a box.. if the cost of carry changes in the option tenor.. you can lose money.. i'm not a rigid efficient market theorist by any means.. but if you wanna find gold .. your gonna have to dig.. anomalies happen in the market just like in regular business. and of course saturated markets are harder to extract profit from.
AAPL @ 563.91... QQQ @ 63.93... The spread between them is 499.98... So in your scenario you make money if the difference between them widens... You have a rising spread indicating diverging market prices. You adjust for volatility on the size of your AAPL trade... and you should have a decent bet on the market. However, if the spread was to narrow and prices converged than you would have losses on two trades almost as if you were trading naked... Am I getting it...? Have you ever found mispriced options or options that were worth it in this type of trading...? AND how would you go about building a trade... that way...?
correlation or dispersion trading i have no experience with.. i've only looked into it a little bit.... i wish i knew more.. but time takes time..
You are right about what could happen if those securities diverged. If you are long AAPL and short QQQ and QQQ went up and AAPL went down then yes, you would lose on both positions. The "trade" is a long bet on AAPL - meaning you bet that AAPL will outperform the market not just "go higher". You short QQQ to protect against a general market selloff. Forget about the price of the individual stocks because if you hedge properly you'll have 10 $10 shares for every single $100 share - you calculate on exposure so the "spread" you are referring to isn't really $500 wide. A better way to think about it would be getting long $500k of AAPL and then get short exposure of $500k on QQQ. This way you are hedged on exposure however still taking a directional bet that AAPL will outperform QQQ (or the general market).
you do not hedge by 1:1 share ratio. you can hedge by shorting qqq in equal dollars (dollar neutral) or you can try to identify the sensitivity of aapl return to qqq (beta neutral). you can choose to under-hedge or over-hedge a bit relative to your baseline view to express your opinion about market/qqq directions. also note if you are negative about aapl, you can short aapl, and hedge with long in qqq.