Portfolio Update: Buying S&P Puts
When I restarted the Portfolio Performance page due to recently opening up a new fund in HK, I said that I will mainly update the blog about funds movement and performance and not focus on trades anymore. Keeping that in mind, every once in awhile I will also update the blog on a few trades I take too, but I will not bother keeping the performance score on these (it takes too much time). So lets get into it…
I have recently purchased some OTM (out of the money) Puts on the S&P 500. Just a quick note, these trades have nothing to do with the fund, but my own personal trading account. Why did I buy some Puts on the US equity market? First of all, my view since a week or two ago has been that the equity markets are now overdue for a correction or a consolidation (Article: Possibility Of A Correction Approaching – Part I). In that article I also showed that Call buying by the Dumb Money has been quite high. Majority of the time, you are always better off doing the opposite when you see a huge Call binge.
Fast forward to today and now we have even more Calls being bought by dumb money, while at the same time smart money is running into Puts to protect their gains since October 04th bottom on the S&P 500 at 1075. As we can see from the chart above, the options activity is leaning towards a correction and while optimism is not as extreme as it could get over a 21 day reading (one trading month), it is definitely becoming so over a 5 day or 10 day average.
On top of that, the Volatility Index has now broken down below 20, making OTM Puts much cheaper than in November or December of last year. Therefore, a risk to reward is pretty decent on a trade like this, where it wasn’t so only a couple of months ago. Furthermore, the VIX has now broken down below 2 standard deviations of 20 days, which tends to signal an oversold condition for the index and a potential pop. The options I own will not expire for the next few weeks, so I got plenty of time to wait for a pullback. I guess we will see soon enough…
