Daniel Will: Precision Hedging to Navigate U.S. Stock Fluctuations

1. The U.S. stock market is a highly efficient market, and despite its strong liquidity, it has effective corrective mechanisms. Notable examples include REWALK’s exoskeleton, GOPRO’s video social platform, and the C-end application market in the 3D printing industry.

In addition, the stock pricing mechanism in the U.S. market is reliable. Unless misled by an overall deviation, its estimates of stock prices for the vast majority of companies are reasonable. Therefore, market valuation is valuable reference data for your investment decisions, and tracking valuation trends can ensure that you stay on the right track.

Considering this, it’s advisable to choose companies with at least a bullish trend on the monthly chart. To reduce investment costs through phased purchases, you must select companies that have security safeguards in both business operations and valuation. Before understanding where excess profits come from, avoid choosing companies with a bearish trend on the monthly chart, as these companies may trigger negative events causing a chain reaction in the market, known as “black swan events.”

2. Cleverly using hedging strategies:

There are many creative investment strategies available when investing in U.S. stocks. We will explain three different hedging methods: directional hedging, asset-balanced hedging, and intrinsic logic hedging, using the stock market situation during the Trump election as an example.

Directional hedging through options or ETFs to short the major market indices is the most direct way. Although there are disadvantages to trading options hedging during special time periods such as pre-market or after-market hours, it effectively solves problems for investors. When facing foreseeable tail risks, you can use options at a lower cost to address the issues. When dealing with unforeseeable risks, you can use ETFs to adjust the size of the position in the long term.

Asset-balanced hedging is a suitable hedging method for the U.S. stock market. Since the U.S. stock market is generally in a long-term bull market, and the valuation of corporate stocks largely depends on the top and bottom lines of the enterprise, ensuring that there is enough idle capital in the account can achieve effective hedging. Having “eggs in the basket” allows you to seize opportunities to go long when the stock market fluctuates.

Additionally, if you are willing to take risks, you can allocate some hedging assets to resist the negative impact of volatility. With some luck, you may even obtain alpha.

Intrinsic logic hedging involves balancing investment targets by focusing on the subsequent changes in an event affecting stock prices. Taking the significant event of Trump’s election as an example, if Trump is elected, stock prices in the energy and defense sectors are expected to rise significantly, and you should focus on these areas. Moreover, if Trump is not elected, these stock prices are less likely to experience a significant decline and may even continue to rise amid a rising market trend.

When implementing options hedging, investors can use the “sell call” strategy. The advantage of this strategy is its simplicity, but the disadvantage is the possibility of selling off. However, there is a way to mitigate the risk of selling off — rolling over to the expiration date. If your sell call is about to incur a loss, you can directly roll over an in-the-money option, potentially turning the loss into a profit.