Up until last week, I was advocating buying September and December puts and writing some covered calls to help hedge portfolio downside risk.
Well, those puts have gotten very expensive, and writing covered calls generates next to no premium. So, why not turn the trade upside down and sell puts, a strategy that is typically associated with being bullish?
On Monday, after another volatile day in the market, the State Street S&P 500 ETF
I'm generally bullish on the market and believe that equity prices will be 5% to 10% above current levels within a year. As such, I certainly don't mind being "put" the S&P 500 ETF 7% below current levels and being paid 3% to do so.
This trade results has three effects:
- If the markets decline by more than 7% and I'm "put" the ETF, I still benefit from the 3% premium I collected and own SPY 10% lower than anyone who bought today.
- The market stabilizes and trades in a tighter range. I get to keep the 3% premium and am slightly ahead.
- The market rallies. Same outcome as #2.
This strategy can also be executed on individual stocks which are not as volatile as the broader market (beta below 1). Investors sentiment has turned so negative that demand for portfolio protection has spiked, causing some mispricing and thereby some opportunities for astute investors.
Procter & Gamble
The key is to look for mispricings, which appear most prevalent in longer dated options.
At the time of publication SPY was a holding in the GMG Defensive Beta Fund and PG, VZ and PFE were holdings in separately managed accounts at GGFS.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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