Trade Update SPY – Taking Off My Hedge, Europeans Failing

by Enis June 26, 2012 10:52 am • Commentary

Update SPY, June 26th at 10:45am – Sell SPY 132 calls at $0.75, a small loss:

I am going to sell the calls I bought yesterday at 0.79 for 0.75 today, for a small loss.  I very rarely get out of a trade after only 1 day.  I bought these calls as a hedge for later in the week.  But as I watch the European developments, I think we are approaching the point where investors lose confidence even in headlines thrown out by European policymakers.  Even watching the market this morning, I have a hunch that people aren’t willing to wait until the European summit this time around.  It looks increasingly clear that the Germans are unwilling to bend.  I would rather sit on my long puts in Jul, Aug, and Sept, and not lose additional money on a hedge that I don’t think will work.  Better to admit I was wrong in buying these in the first place than hold out on a misinformed hedge.


Original Trade SPY, June 25th at 1:26pm – Buy June 29th expiry 132 calls to hedge European event risk:

As I mentioned in this morning’s Macro Wrap, I expected the recent selloff to make new lows, and I am quite bearish on the 1-2 month outlook for markets as global recession fears escalate.  Earnings season is likely to confirm those growth fears, based on recent reports from broad names like PG and CEO commentary about Chinese demand.

BUT, this week is the one that worries me on the potential for a bounce because of the playbook for previous EU summits.  European policymakers, ex-Germany, are going to do everything in their power to induce confidence throughout the week based on the setup of their expectations.  I have little confidence that the summit induces any lasting rally given the headwinds.  In fact, I anticipate markets to feel the ultimate downer after the summit, and we should retest the lows of the year.

In the meantime, I am going to buy weekly SPY calls for a move to 133-134 in the next few days as a HEDGE against my existing short positions.  My current portfolio has long puts or put spreads in CAT, SLV, CHK, JPM, AZO, LNKD, GE, and BMO, so I’m obviously very exposed, and want to be exposed, to a down move over the next month.  But I want some protection based on my hunch of a possible event rally, just in case.

Here’s the trade:

TRADE: SPY ($131.05) Bought June 29th weekly 132 calls for 0.79

Break-Even on this Friday’s Expiration:  

Profit above 132.79

Losses of up to .79 between 132.00 and 132.79, max loss .79 below 132