Thursday, August 6, 2009

Do You Use Protection?

As the market stair steps away and people getting a smidge on the complacent side, we have the VIX (the price of put protection or the fear barometer) at the lowest levels in 12 months. August is also traditionally the time of year when volatility starts to show signs of perking up into the fall. So without even taking into account where the market is or where it has come from, you should know that if you plan to insure your portfolio into the end of year, now is the time to do it. Institutions have been buying up volatility on the cheap recently in the form of VIX calls. So does that mean you should too?

Well, I really am no VIX expert by any means. That title would go to Adam Warner over at Daily Options Report.

However, I do know that the market has ripped higher in the last month and we are bumping up against severe resistance in the Nasdaq from last fall and some significant long term fibonacci retracement levels and confluences are nearing here in the 1000-1050 region. Nasdaq has retraced roughly 50% of the bear market decline and the SPX is at about a 38.2% retrace.

Tomorrow's jobs report has been on everyone's eyes all week and that has bid up the implied volatility into it. Notice the VIX actually up most of the time this week even when the market was up. After the jobs report comes out in the morning you will be able to purchase put protection at a slightly lower cost.

And if you can't sleep at night lately because you are over-exposed on the long side, then you will benefit from buying some cheap insurance for your stocks you plan to hold. You insure your home and car, why not your stocks?

If you are feeling nervous and can't sleep at night lately, then you are probably over-exposed to the long side. If you are long stock you can also form a collar in which you sell an OTM call and put and OTM put for ideally even money. This caps your upside but protects you from any surprise selloff.


Anonymous said...

Jason do you realize that for weeks and weeks, you've been warning people about how we're coming up on "severe resistance" and that "you're cautious" and "expecting a correction" over and over and over? The exact opposite has happened, and the market has continued its powerful, upward march. The drop in unemployment further proves that this bull market is real and here to stay. I don't think I'm going to follow your blog anymore because you're not waking up and smelling the coffee. You can sit and wonder how many more weeks will pass by until you can finally tell us "I told you so" but in the meantime I'll be busy making tons of money with calls while you everyone to take caution.

Jason said...

Actually I have been the exact opposite. I have been bullish for awhile now. It is alright to be cautiously bullish but you have totally taken my words out of context. You must be a newbie who doesn't understand and is bitter cuz you have lost money.

One simple solution for you: dont read my blog.