Friday, June 1, 2012

Options on Double Shorts....(aka: A win is a win)

CCI was looking to get a short position in play before the unemployment report this morning. Late Thursday, I considered my usual strategy of buying the double short S&P500 (SDS) to provide some portfolio hedge. However, I chose a slightly different strategy.

With SDS trading around $17 late Thursday, I sold one lot of June 1 weekly $17 puts for $.26.  A weekly option made this essentially a 1 day trade. That is about as long as you can hold these double short etfs anyway, so it seems like this approach enforces the discipline of a short holding period for these type pf positions. Also implied volatility was high so the option premium seemed rich.  Yes, I know this is a derivative of a leverage derivative, but....hey....when in

Anyway...This trade capped the potential gain for trade at 1.8%, in exchange for having a 1.5% cushion on the downside before the trade would lose money.  My logic was
  •  if the unemployment numbers would be good, that might not be enough to drive the market up too much and the 1.5% cushion might provide a way to get out of the trade with a tie. 
  • if the unemployment report was bad , the market would be down and the trade would return 1.8%
The unemployment report was worse than expected and the market went down more than usual.  Just having bought SDS (as I usually do in this situation) would have returned over 5% today.  Instead this trade "only" made 1.8% in 1 day.   A small consolation prize on an overall bad day.  Also, in hindsight using this more complex strategy was not the right choice. 

BUT....A win is a win.

2-1-4 hedging via double shorts this year.

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