Tackle Today: Weapons of Mass Protection | Tackle Trading
≈ Using time bombs to protect your portfolio. ≈
“In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
– Warren Buffett on Berkshire’s 2002 annual letter to shareholders
Let’s be fair to the wise man of Omaha. Although this phrase is very famous, it doesn’t stand on its own. Anyone who wants to fully grasp the context supporting his statement must read the original letter, where he even includes a free class on what derivatives are, how they work and why he sees them as time bombs.
Tackle Traders know how leverage can cut both ways, just like fire and hammers. To humans, objects have meaning and, therefore, it’s the goal you have in mind and the usage you make from them to achieve the said goal that gives them their ultimate definition and concept.
Yesterday’s newsletter — Highway to Hell — , sparked a nice feedback from one of our #TeamTackle members.
Those were all valid questions. However, the ultimate answer to them is actually non-existent. How much capital should be deployed, how far OTM, how far in time, the target beta-weighted delta, etc. will only come from either learning a ready-to-go hedging system and adapting to your own reality or creating a hedging system of your own.
A hedging system can be as simple as buying OTM SPY puts or as complex as a mix of currencies, precious metal, futures contracts, and OTM SPY puts, also taking into consideration the burden of cost and how much you are giving up on profits and theta. It all depends on the goals you want to achieve.
The best hedging system is one that fits your portfolio like a glove which leads us to Portfolio Design. Analyze your portfolio, see what types of trades and securities you are holding, set goals and come up with a custom-tailored hedging plan that works for you.
This is how you turn a weapon of mass destruction into a weapon of mass protection.
Chart of the Day: Hedging system considerations
This is not a definitive list of topics you might want to consider when developing a hedging system for your portfolio. Hopefully, it can serve as a good start for you. Reading and learning from others, crafting a system and testing it before implementing is probably the wisest move.
Video of the Day: What is Hedging
A hedge is a strategy to reduce the risk of adverse price movements in an asset. It can be used to minimize or offset the chance that your assets will lose value. It also limits your loss to a known amount if the asset indeed does lose value.
Trading Justice Episode 317: Professional Day Trader Slawomir Juraszek
In this episode of the podcast, Matt and Tim welcome Slawomir Juraszek a.k.a. Slawek J. Slawek was born and raised in Poland, came to the US in 2002, started trading in 2008 and is a professional day trader. He’s a down to earth guy, family man, and wonderful person.
Financial freedom is a journey
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Originally published by Tackle Trading on April 17th, 2019.
