Hedging A Rally 'Running On Empty' "History doesn't repeat itself, but it does rhyme" Mark TwainIn a few articles during the second quarter of 2011 (this one, for example), I
Air Jordan Shoes mentioned a couple of reasons why investors might have wanted to consider hedging their stocks then:
With stock market volatility declining recently [.] it has gotten cheaper to hedge. [.]Prudence may be warranted with the end of the second round of the
Cheap Air Jordan Shoes Fed's quantitative easing (QE2) scheduled for the end of June. David Rosenberg's warning also proved prescient, as the S 500 declined 14.3% during the 3rd quarter.
David Rosenberg has offered another warning. In a Financial Times column last week ("Stock market rally is running on empty"), Rosenberg offered a glimmer of current opportunities, noting that "tech and financials screen well when their price/earnings ratio is bench marked against growth estimates for the next three years, a measure known as a PEG ratio," before noting a number of reasons (a lack of participation by retail investors, heavy selling by corporate insiders, anomalous economic data due to the warm winter) why the current equity rally lacks legs.
Given Rosenberg's recent warning, investors may want to consider taking advantage of
Cheap Jordan Shoes the current low volatility and relatively low hedging costs to hedge their portfolios. Since Rosenberg wrote positively about lowPEG techs and financials, the table below shows the costs of hedging four lowPEG techs and financials against greaterthan23% declines over the next several months, using optimal puts.
A ComparisonFor comparison purposes, I've also included the costs of hedging the SPDR S 500 Trust ETF (NYSEARCA:SPY) against the same decline. First, a reminder about what optimal puts are, and a note about the 20% decline threshold. Then, a clarification about the correlations between the VIX and optimal hedging costs we've observed, followed by a screen capture showing the current optimal puts to hedge the comparison ETF, SPY.
About Optimal PutsOptimal puts are the ones that will give you the level of protection you want at the lowest possible cost. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
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