SPY: May Be Time For Some Near Term Portfolio Protection

by Dan November 2, 2011 11:30 am • Commentary

I have gotten a few questions from readers who have gotten a little turned around with the market moves of the last week.  Given last week’s strong performance and what appeared to be an agreed upon compromise to some of the debt issues in Europe, many investors thought we had the all clear sign into the end of the year and bought stocks in an effort to play catch up after 10 months of very erratic equity returns.   If you are one of those people it may make sense to consider some  near term “relatively” cheap portfolio protection against a long portfolio.  Especially when you consider the continued risk of disappointment out of Europe and the coming events of the following three days: FOMC meeting today, ECB meeting Tomorrow and G20 at end of week.  

The Following is not a call on the market direction merely a way to protect some recent purchases to a level that looks like reasonable support in the SPX down about 6% from current levels.

Proposed Hedge Structure against a long Portfolio:

SPY $124.22 Buy Nov 121 / 116 Put Spread for 1.00

-Buy 1 Nov 121 Put for 2.00

-Sell 1 Nov 116 Put at 1.00

Break-even on Nov Expiration:

Profit btwn 120 and 116 make up to 4.00, below 116 make full 4.00

Loses btwn 120 and 121 lose up to 1.00, and above 121 lose full 1.00