Why I didn’t sell any of my downside hedges this week–and some thoughts on how to decide when to sell

Why I didn’t sell any of my downside hedges this week–and some thoughts on how to decide when to sell

On May 11, when the Standard & Poor’s 500 was headed for a 2.14% loss on the day, I took a long hard look at selling the downside hedges I own in my Volatility Portfolio. In that portfolio I own a September 17 Put Option on the iShares Russell 2000 ETF (IWM) and two Call Options on the CBOE S&P 500 Volatility Index (VIX) for July 21 and August 18. I came very close to pulling the Sell trigger on one of the VIX calls. (Because the VIX goes up as fear in the market rises (usually on a sell off or worries about an impending sell off, the Call Option on the VIX acts as a Put Option. It will become more valuable as the market falls.) I was in the black on the August 18 Call Option with a strike price of 22 because the Vix had climbed 26.33% on the day to a close of 27.59. I think the decision not to sell was a non-decision. And a mistake. I dithered over it for so long that the market had closed by the time I decided to sell. A sell would have resulted in a profit of 9.2% from my March 23 buy. Not huge but still money. I decided not to sell the iShares Russell September 17 put with a strike price of $215. The ETF would close that day at $218.96 and then drop to a close of $211.75 on May 12. A Sell would have resulted in a gain of 15.6% atom my March 24 buy. Unlike the failure to sell the VIX Call, I don’t think the decision not to sell the IWM Put was a mistake even if it meant foregoing a 15% profit (on a holding period of less than 2 months.) Let me explain.

These are the markets that try portfolio’s souls

These are the markets that try portfolio’s souls

I’d like to think that the volatility of last week is all over and a thing of the past. But I don’t think it is. This is a transitional market with sentiment moving toward value, cyclical, and post-vaccine stocks and away from technology momentum plays. And it’s also a market trying to figure out how to reprice all assets in light of a potential move to lower stimulus bond-buying and to raise interest rates at some point in the future. These kinds of transitions don’t occur smoothly and I think we can expect more volatility.

Economy grows at an annualized 6.4% rate in the first quarter

Economy grows at an annualized 6.4% rate in the first quarter

In the first quarter the economy grew by 1.6%. That’s equal to an annualized growth rate of 6.4% for U.S. GDP. You don’t have to look hard to find the cause. Consumer spending rose 2.6 percent in the first three months of the year, with a 5.4% increase in spending on goods accounting for most of the growth. Americans increased spending on cars, furniture, recreational vehicles and other long-lasting items, as well as on clothes and food

Hold off on those VIX hedges for a bit–a robust start to earnings season from the big banks this week could send the “fear index” even lower

Hold off on those VIX hedges for a bit–a robust start to earnings season from the big banks this week could send the “fear index” even lower

Over the weekend I posted that I’d be looking at a possible buy of Call Options on the CBOE S&P 500 Volatility Index (VIX) today–depending on how the VIX behaved in the Monday action. Today the VIX regained some of the ground that it gave up last week, closing ahead 1.92% to 1701 after closing at 16.69 on Friday. And I’m going to hold off on buying VIX Call Options until I see the trend in first quarter earnings reports.

Apparently everybody decided today that tomorrow’s March jobs report will show accelerating economic growth

Apparently everybody decided today that tomorrow’s March jobs report will show accelerating economic growth

With the financial markets closed tomorrow for Good Friday, traders and investors jumped in to buy today ahead of what is expected to be a jobs report tomorrow morning showing unemployment dropping to 6.0% (by the official measure) from 6.2% in February. The Standard & Poor’s 500 closed up 1.18%. The Dow Jones Industrial average ended 0.52% higher. The NASDAQ Composite finished higher by 1.76%. And the small cap Russell 2000 gained 1.50% on the day.

Market squares positions ahead of weekend, but doesn’t quite make up for yesterday’s losses as trend remains to the downside

Market squares positions ahead of weekend, but doesn’t quite make up for yesterday’s losses as trend remains to the downside

The market went into one of it’s typical square the positions move ahead of the weekend. Nobody wants to be too far out in front of anything that might happen this week. U.S. and Chinese trade talks could see an outbreak of pie throwing. The Federal Reserve could decide the while Treasury bonds will count against bank reserve requirements again on March 31 (as the central bank announced today) stocks starting with the letters B, G, and V won’t. Embattled New York governor Andrew Cuomo could announced that as of Monday New York City restaurants could open at 41.5% of capacity (up from 35%) as long as the 423 candidates running for New York City mayor swear to make it a campaign promise never to eat pizza with a knife and fork. But the market wasn’t about to let unfettered optimism break out either. And stocks that were down big yesterday only showed modest recoveries today. For example, Square (SQ) down 9.00% yesterday, regained 0.24% today. Twilio (TWLO) down 5.19%, picked up 1.07% today.

Special Report: Profit and Protect–My new hedge on the VIX

Special Report: Profit and Protect–My new hedge on the VIX

The market seems to be very complacent about the risk of heightened volatility over the next couple of months even as the actual track record on volatility shows that the odds of big short term moves are increasing. Which leads me to add the July 21 Call Options on the CBOE S&P 500 Volatility Index (VIX) to my Volatility Portfolio today, March 16. The VIX, which measures how much investors and traders are willing to pay to hedge risk in the S&P over the next month or so, has dropped below 20 today to 19.59 at 1.20 p.m. New York time.