Take advantage of the soft market rally - RESET THOSE HEDGES!!

by Wayne Ferbert on August 20th, 2012

At Buy & Hedge, we have started rolling our September protective puts out to future months. Our rationale is simple: they were bought 6 months ago and are way, way, way out of the money. But they still have a tiny amount of time value left.

Even if we let them expire and needed to buy new ones at the end of September, we’d still likely be rolling them to the June 2013 expirations in many cases. And for the largest index options we invest in, the June ’13 expirations are already available.

But one of the biggest driving forces making me want to roll the hedges: the high market levels we are seeing in the last 2 weeks. The S&P500 over $1400 is near the 52 week high and the 2012 highs. However, the volume in the markets here in the Summer rally have been light – meaning their might not be conviction in this rally. So, this seems like a great time to be resetting your protective hedges to new higher levels while the S&P500 is at this ‘artificial’ high.

I mentioned the time value left in the options that are being rolled. Since they are so far out of the money, the time value is low. But with 30 days left, there is still a little bit left. And every red cent counts. So, rolling early here totally makes sense.

What is the downside? If the market runs another 100 points between now and the September expiration, waiting to roll at the end of September would have been a better decision. You would have been able to set your new hedged floors at higher levels. However, that is the only scenario that would have me regret a move up in resetting my hedges.

So, reset those hedges with confidence! After all, do you know anyone that thinks the market is likely to run another 100 points ahead of the election this Fall? Me neither.

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