It was interesting to read of the various types of portfolio long-short strategies. Here's a good overview. Mergers and pair trading are the inspiration for some strategies. Strategies have even been designed to play on seasonal anomalies and takeover rumors. What I had in mind is called a market neutral strategy. Purchase both long and short equities in equal dollar amounts to take market variations out of performance. The return achieved would depend strictly on stock selection and be largely independent of general market moves. This is exactly what I was contemplating given the promising performance to date of our Change of Heart portfolio.
Then reality showed up as usual. I never shorted a stock and it's apparently not easy. You must use a margin account which rules out IRAs. Wouldn't want those savers to have a chance to hedge. The stock you want to short might not be "readily" available so transaction fees go up or the whole trade might fold. Even if the short trade is accomplished, there's the risk it could be unwound at anytime without your agreement because you actually are only "borrowing" the shares.
Alternatively, could one execute a market neutral strategy with options? Many new pitfalls pop up. You now have to get a grip on the strike price and the time premium of the option because there's an option expiration date. Bid and ask spreads can be large and many options are thinly traded. And the jargon-- "iron condors" and "butterflies"-- it's just intimidating.
I have requested our non IRA account be changed to margin eligible. Even if implementing a market neutral portfolio never happens, I'm determined to short a stock one day just for the experience.
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