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Hedging A Short Crude Position: 2 Stocks To Consider

Hedging is a concept too often misunderstood, or worse, badly executed. To many investors and traders, a hedge simply consists of a trade that directly opposes their main position. They may be long a portfolio of stocks, and then buy puts on an index, for example. To my mind this isn’t hedging, it’s just effectively cutting your position size. You could achieve the same thing by just selling some of your stocks. A good hedge is one that gives some degree of protection against an adverse move in your position, but still has a chance of appreciation if things go as you expect.

These thoughts came to mind as I considered the substance of what I wrote here last week. I didn’t want my first piece for Oilprice.com to be a negative, but it would have been dishonest to write anything without first giving my view that crude was more likely to trade down in the coming month or so. With that overall view in mind, I set about finding a few positives to write about, that could be used as an effective hedge should you trade that view and short crude, either through futures or options.

In last week’s piece I mentioned that I liked Cobalt International Energy (CIE) and that is the kind of thing I am talking about. The only problem with that, however, is that I first wrote about that stock on January 28th, and it has gone up by about 25% in the last couple of weeks. That’s great news for anybody who bought it then, but it doesn’t look like such great value now, although there may…




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