An Option Play for Semi-Bears

04/18/2013 8:00 am EST

Focus: OPTIONS

What started out as a hedge for his long stock market portfolio is now just a short trade, says Gary Tanashian of BiiWii.com.

Several weeks ago I initiated long-term puts on the SPY. They are dated at December of 2014. I put them in a separate little trading account so I do not have to look at them bleeding day after day. Recently some Dec. '14 puts were added against the QQQ as well. This was done for days like today and what I think is a bad general risk profile on the US stock market.

What is a day like today? It is a day where a hopeful and predictable bull rebound is failing badly. Speaking of failing, I failed to reestablish other bear positions in regular portfolios yesterday when I should have; which again highlights the reasoning for the long-term puts in the other account. So I don't outthink myself.

The market has not only been diverged by commodities and incoming economic data, but it lost its leadership from tech to semis to small caps to the Tranny. Now with a failure to add to yesterday's pump fest, the market is making bearish nominal signs as well.

People should be managing risk all around.

A reader mailed a good question.why don't I just ladder in to a market short position if I am long-term bearish? My response:

"I am not a perma bear, just bearish for a swing. Laddering in would imply I am investing in the bear case, which I am not. The reason I put the puts so far out is because the market looks likely to grind out a top of some kind, and I wanted to be ready for it. When I started the positions, it was against long stock positions. Now it is just basically a short trade, whether lasting weeks, months or toward the puts' duration."

By Gary Tanashian of BiiWii.com

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