Friday, October 22, 2010

Bookkeeping: Rolling Out Portfolio Insurance via SPY Put One Month

It has been nearly impossible to short much in this market for approaching 2 months - since the infamous QE2 promise at Jackson Hole, Wyoming in late August.  There have been some individual situations but just about everything has rallied, and certainly betting against the index has been hazardous to (anyone's) health.   That said back in late September in the S&P 1120-1130 area I did put some 'portfolio insurance' on in the form of a 1% batch of SPY puts. Unlike my usual forays which are short term in nature and using near term options - these were December 110 SPY puts.  In the month since, the S&P 500 has tacked on some 50-55 points and obviously the insurance was "not needed".  Indeed as the rally has continued AND complacency reigns, premiums have come in on options as "no one loses in the market the Fed backstops".

I am down 62% on the position, costing 0.6% of performance over the past month - but that is the cost of the insurance.  If we had had a sharp drop they would have paid off handsomely.   I've decided to roll this insurance out another month, and since the premiums have dropped substantially I can buy even better protection for a similar price to what I paid back a month ago.   For the right to own January 115 SPY puts I am paying only a slight premium (3.50 per contract) over what I paid for December 110 (3.33).  What this means if if those gaps in the S&P 500 chart fill (1090, 1110) sometime in the coming months of 2010, my gains will be even better.  Of course if we just rally without pause for another 3 months, I'll be facing a similar loss proposition.  That said, generally gaps fill on indexes in 2-3 months - and we'll be hitting the 2 month mark in the next fortnight.  

So we'll put a batch on here in the low S&P 1180s (same 1% exposure as last time) and the next insurance play will be at yearly highs of S&P 1220 aka "next week" (whichever comes first) ;)  I've really only "added" 0.6% short exposure since I had my old 0.4% remaining that I am 'rolling'.

For those who believe the market cannot go down due to QE2, remember July 2009.  The market suffered serious setbacks and the first real correction from the March 2009 low which came about 3 months into QE1.  So it can happen - and will happen.  The key is to stay solvent between now and then.  Even better for those who play both sides of the market, the imbalances Bernanke is creating will create a lot of wins on the short side in the out years (2012-2013) in my opinion.  He is simply Greenspan on steroids.  I expect the 'long only' crowd to suffer tremendous losses sometime in the next 1-3 years (again) as our solutions are short term in nature, and rather than using fingers to plug the burgeoning amount of holes, we are using entire bodies to try to cover them up. 

p.s. on the chart above the Aug - Oct 2010 run is looking suspiciously identical to the Feb - Apr 2010 run, no?

Long SPY Puts in fund; no personal position


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