Tuesday, August 31, 2010

Bookkeeping: Buying Portfolio Insurance with Small SPY Put Exposure

As mentioned in the previous post I am going to buy a small form of portfolio insurance via a longer date put position.  The size will be small (a tad over 1% exposure) and this is an either or proposition, either it will be headed to zero or should be a big winner.  The third outcome is "meh" but that would only occur if the market stays in this spot for about 7 weeks.

I bought a batch of October SPY 104 puts, with intention of providing insurance if S&P 1040 breaks.  I'll most likely sell on a retest of S&P 1010 if and when as I expect the powers that be to defend that level.  That doesn't mean 1010 will hold either if we get there but I'd expect some bounce there even if there is more downside later in the year.

If the market rallies from here these puts will expire worthless (or near to it) so I risk 1% of performance for the year; with over 50% to spare that's fine for purposes of this trade.

I will reiterate what i said last week - the more times you test the level the more it weakens.  Eventually you break through (almost always) but those levels will be defended.  We saw that at S&P 1070, and now we see it at 1040; it will take a reaction to economic news to break these levels most likely since the defense of these levels will be urgent in the normal ebb & flow. To go along with this option position I increased by short exposure on TNA/BGU in very modest proportion with this bounce to S&P 1048-1050ish.  This has nothing to do with the action today, and everything to do with the economic reports the rest of the week, along with the technical setup.

Chicago PMI this morning is showing the same pattern as just about every other economic report than past 75 days... even when it's "matching expectations" it is degrading fast.  Without ever increasing government support of epic proportion the domestic economy is eroding quickly.

 Chicago PMI: 56.7 vs. 57.6 expected, 62.3 prior. Employment 55.5 vs. 56.6 prior. New orders 55.0 vs. 64.6 prior. 

Long Oct SPY 104 puts in fund - short TNA/BGU; no personal position


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