Heading into the Christmas Holiday week we detailed some portfolio hedge ideas we thought made sense given the uncertainty surrounding the start of 2016 and sell offs we have seen in each of the last two years in Jan and Feb. When we wrote the post on Dec 18th we did not think the timing was correct to slap on portfolio protection as U.S. stocks were down nearly 5% from the highs earlier in the month and implied volatility (options prices) were pumped. We stated that we’d prefer to wait for a bounce in the market as well as the reduced implied vol that would come with the Holiday shortened trading weeks. Here’s how we phrased that at the time:
I would like to wait for a bounce on all of these hedge ideas. Next week is a shortened Holiday week and is likely to see less panicky trading and lower implied vols. That offers a good time to get into some hedges for the beginning of 2016 for those looking to tactically protect portfolios. The following are based on the prices and implied vols at the moment and do not reflect the better entry next week we prefer:
So What Are the Trades?
The market is higher now, and implied vol is lower. So now seems like the perfect time to execute the trades we talked about. Let’s start with IWM. We looked at the Feb 110/100 put spread which was $2.20 when the etf was $112. Now with the etf $114.80 it’s about a dollar less:
Trade – IWM ($114.80) Buy the Feb 110/100 put spread for $1.15
- Buy 1 Feb 110 put for 1.55
- Sell 1 Feb 100 put at .40
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The next thing we looked at was QQQ, also the Feb 110/100 put spread. When the QQQ was 111 this was trading $2.30. With the QQQ now over $114 it is a dollar less:
Trade – QQQ ($114.20) Buy the Feb 110/100 put spread for $1.15
- Buy 1 Feb 110 put for 1.55
- Sell 1 Feb 100 put at .40
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The last index etf we looked at was SPY. When SPY was 201.50 the Feb 200/180 put spread was $4, with the SPY now above $207 it is is $2 less:
*Trade – SPY ($207.25) Buy the Feb 200/180 put spread for $2
- Buy 1 Feb 200 put for 2.50
- Sell 1 Feb 180 put at .50
Rationale – When doing portfolio hedges identifying possible inflection points in the market is important. The slow year end trading has given us an opportunity to enter these trades with lower vol as the market drifts higher into year end. All three trades look out to February and give time in case the market starts 2016 in a rocky fashion. In each case the trades risk about 1% for almost 10% of downside protection in case of a market correction.
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