IF YOU ARE LIKE ME AND THINK THE 28% RALLY IN THE S&P 500 SINCE SEPT 1 AND THE 100% GAIN SINCE SPRING 2009 IS A LITTLE OVERDONE AND DUE FOR A PULLBACK (POSSIBLY AT ANY MOMENT)….you may want to consider expressing this view through short-dated put spreads rather than being naked short equities….
Why Put Spreads vs Naked Short?? well if you are an options trader than you know your professional equivalent of slow waterboarding is having the options that you own decay…..losing $ just for the right of owning the option……well i contest that i believe an even worse feeling is to be naked short into a wildly giddy blow-off top, and no knowing when you are gonna have to pull the chord and cover that short….
So in uncertain market i would rather commit a certain amount of premium to express a view. In this very situation where i am not sure when the top will be and if there will be some sort of painful rally just to accentuate the F in the FU to the shorts i want to look to short dated put spreads in the [SPY] the etf that tracks the S&P 500….
Break-evens on March Exp:
-132 or higher you lose the 1.00 Premium (less than 1% of Underlying)
-131 (down 1.5%) Btw 132 and 128 u can make up to 3.00
-Below 128 (-3.75%) u make $3.00
Chart below helps reinforce my view for a near-term sell off in the S&P (the Red line represents the SPY)….the 2 yellow lines represent the EWZ (the etf that tracks Brazil’s Bovespa) and the FXI (etf that tracks the Shanghai composite)….see how the EWZ and the FXI topped out in NOV (almost 15% ago) and the S&P continues to make new multi-year highs..
WHY is CHINA and Brasil selling off? simple both countries are actively moving to stifle inflation and moving towards tighter monetary policy…this is not good for equities…..equity investors here are convinced that our fed will do the predictable and keep rates as low as they can for as long as possible and that equity investors have little to fear from rational monetary policy…..
I have to believe that our FED will not make the same mistake again and that the smart money will come around to this sooner or later (higher rates!!) and that this will start being discounted in our equity markets….