Monday, July 20, 2009

Bookkeeping: Buying Some August 90 SPY Puts (SWGTL)

I am not breaking out my option purchases and sales because most have been very short term (intraday) on these "trend" days [Trend Days] but I did mention towards the end of June I was changing the way I hedge the portfolio in a subtle way.

As I wrote in one of our weekly summaries in late June:

I have a very high cash position and I've made one small adjustment on the short side ... since its impossible to tell the "theme of the week" (reflation? consumer? healthcare? banks?) I've bought some out of the money index puts as a hedge... about 2% of the portfolio ($20K). Right now they are S&P 850s... if we have any big bang effect between now and the 3rd week of July it will provide some oomph; otherwise they will expire worthless in 3 weeks.

That position worked out like a wonder as the S&P fell from 920 to 870 in 8 sessions.

In the past we used to, aside from using individual shorts, use some levered ETFs as our hedges - which I still plan to do, but I love the put buying as an insurance plan at times of euphoria. You only risk so much capital (in that case $20K or just under 2% of the portfolio at the time) and if it expires, so be it... you still have the long side of your portfolio and you take a limited loss. Unlike shorting in which your losses are unlimited (in theory). So it really has to be thought of as an insurance policy.

When it works like it did in that episode from late June to early July you have massive upside. At S&P 930 area where I slapped those puts on, no one thought S&P 850 was probable. Within a week, when we hit S&P 870, it was very probable and our puts exploded in value. Those puts contributed in a very sizeable way to our performance for the previous 4 weeks (I will have an update tonight by the way on performance) - although I didn't expect the market to just fall off a cliff immediately when I added them, that was just good fortune.

As we discussed last week, you can use these calls or puts intraday on the SPY (which is the S&P 500 ETF) in an aggressive fashion intraday to bet directionally - they are very liquid, with a tight spread (0.01 much of the time). Since we have so much cash, I've occasionally been throwing 5-10% of the portfolio in that direction when the opportunities arise on the "trend days" (i.e. "Intel day" last week). Since the duration of holding is so short, its too cumbersome to list out those trades, but since what I did today is more of a long term holding I'll list it out as an individual trade.

I've effectively repeated the strategy I did in late June here, with a slightly larger bucket... around 3% of the portfolio. The August puts are SPY 90 (SWGTL) which is roughly the equivalent of S&P 900. Today they are selling for roughly $1.10. I put them on this morning around S&P 947. If we fill that gap down at 906 in the next month, these puts should again, explode in value - especially if it happens in the next few weeks. If not, they expire worthless in a month. Of course you can sell part of all of it in between now and the 3rd week of August as well.

I'll consider this as part of my "short" allocation in the weekly summaries.

Long August 90 SPY Puts in fund and personal account

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