Getting tactical

by Wayne Ferbert on July 30th, 2012

At Buy and Hedge, we are long-term investors. The best long-term investors are disciplined and avoid the traps of trying to time the market. In being disciplined, we think about our long-term approach in strategic and tactical terms. The strategic is the asset allocation and the indexes we select. The tactical is the effort to roll hedges and roll our calls.

I have a feeling that the tactical discipline of our approach is going to get a lot of exercise in the coming 60 days. The rally last week on the back of the GDP numbers doesn’t make sense in the long-term. The market accepts the numbers are weak and now expects QE to save the market – hence, the rally.

I think the market is losing sight of what the poor numbers and resulting potential Fed intervention really means in the end game – a weakening US economy. So, the market response has me worried. The fact the market could rally like it did last week and NOT rubber band back down today has me believing that the market could hold on to an upward trend. And if the Fed actually hints at QE3 again or announces it, watch out. The market will really push up.

So, why does that have me thinking tactically? Two reasons: (1) selling calls and (2) rolling hedges.

On the first point, if you are running collars (our most popular strategy) you probably just sold calls last week right ahead of the rally. These likely expire in August or September. And in just 2 days, they are much closer to the money then they were when you wrote them. The net/net here: watch them closely. We don’t usually tell investors to watch the market closely. But if these calls go in to the money with 2 full weeks to go before expiration, you might want to close them early and roll to the Septembers on the early side. If you get to the last week and they are still OTM, then I recommend waiting it out.

As for rolling hedges, any market run up might give you a good chance to reset hedges early to higher floors. If you are laddering your hedges like we taught you, you probably have some protective puts expiring in September. It is a quarter end and popular to use with ETFs for building a quarterly ladder. If you do, watch closely here in August and early September. If those September puts go completely worthless because the market chases up even higher, it might provide a chance to buy the March ’13 or June ’13 expirations early also. Then, you can roll forward to a new higher floor. Just look for the market run and if the S&P tests new highs around 1410 or higher, think about resetting the hedge floors on your near expiring hedges.

We don’t usually advocate looking for these little early exits or rolls. But then again, we don’t usually have QE3 looking over our shoulder. With the market behaving in a not so rationale way, we need to look out for these opportunities. So, even though it is Summer, you might need to watch a little closer than usual.


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