August 26, 2011 – Time to Buy Some Fire Insurance


3) Time to Buy Some Fire Insurance. I am looking at oil take a swan dive here, bonds pop a point, and even gold performing a rallyette off its $1,700 low. It all looks like 'RISK OFF' to me. So I'm thinking gee, maybe I should hedge some of my downside risk here.

It's not like the positions are so small that I can skip hedging, as they have been for the last couple of months. Then a large move by financial markets could cause only a small impact on my performance. But I have been bulking up my book lately, adding positions in the (TBT), (BAC), and running longs in (CAT). I have also had an incredible hot streak, and it is time to protect some profits.

Going into this morning, the market had been up two days in a row, which is almost unprecedented in the month of August. This will amount to a big screaming 'SELL' to the day traders.

So it seems prudent here to hedge the rest of my portfolio through putting some (SPY) puts. The pop in the market at the open delivered by (BAC) was the gift that allowed me to get a great fill. That cuts my delta going into Bernanke's Jackson Hole speech. I picked the $112 strike, as this is just above the floor of the recent action.

If the Bernanke puts everyone to sleep with his speech and markets rally, I will cover with a small lost. After all, you don't complain when you buy fire insurance and your house doesn't burn down. If he disappoints and we revisit $112, I have downside protection. That's unless we get the entire down move today in anticipation, in which case, I might cover at the close.

Now That We're Bulking Up the Portfolio,

It's Time to Put on Some Downside Risk


At Least Somebody Has a Sense of Humor!