Trading Strategy - The almost perfect hedge is short against the box, but with "the new rules" now in place, it is considered by many the perfect trading strategy.
When an investor or trader goes short "against the box" they are engaging in a very conservative situation. For example: If an investor owns (long) 100 shares of ZNC and sells (short) 100 shares of ZNC they are now in the almost "perfect hedge". There is no loss if the stock plummets in price and there is no gain if the stock climbs to the stratosphere (hence the "almost perfect hedge").
The almost perfect hedge can be a useful trading strategy in a situation where an investor currently owns a number of shares of stock but does not have physical possession. This might be a situation where an investor is receiving the stock from the settlement of an estate, a corporate pension plan, or any other situation where ownership is being transferred.
In the situation of impending delivery an investor or trader may want to "short against the box" so that no value will be lost during the process of delivery (when the shares could not be sold on the open market). In order to effectively execute this trading strategy the investor or trader must meet certain margin requirements (Regulation T) which could require a deposit of 50% of the stocks value at the time of entry.
However, under the new rules of Regulation T, a savvy trader could quite possibly enter this position without having to deposit any additional margin monies. This of course would depend on the size of the investors or traders account and the ultimate structure of the trading strategy.
Shorting against the box can be a helpful and profitable trading strategy in the proper situation, however it should be used with caution and understanding. Shorting against the box can also be a profitable trading strategy when the new rules of regulation T are used to their full potential.
If becoming a DartThrow Trader, so that you can quickly, easily and intuitively determine when to short against the box, is something that naturally appeals to your trading strategy; then we would like to invite you to visit http://www.dartthrowtrader.com and enroll in our free - successful investing and money management weekly newsletter.