Mid-Year Rebalancing Ideas: Part 2

by Wayne Ferbert on June 11th, 2013

The end of June is a good time to consider re-positioning your Buy & Hedge portfolio – especially since you probably have end of quarter options that are expiring. But to get it right, you need to do some planning – AND NOW IS THE TIME TO PLAN!
Yesterday, we advised you to rotate from some of your winners in to other under-performing investment categories. Today, we need to consider what we do with our protection levels in our portfolio.
If you are running a Buy & Hedge portfolio, you almost certainly have some June put protection expiring as part of your laddered portfolio approach. Additionally, you probably bought this protection at least 6 months ago – and maybe even nine months ago. Either way, these puts are out-of-the-money by a long shot – and you need to re-establish your protections on your positions.
Given the current market environment, there are a few ideas to consider in creating your hedges:
Idea #1: Don’t wait until the end of June or the June expiration to start buying your new put protection. Your expiring puts are most certainly worthless. Start buying the long dated puts now - ie, the December 2013, Jan 2014, Mar 2014, and June 2014.
The extra two weeks you will be in these positions will not drive the price that much higher – plus, the volatility index has been moving up as the market has gotten shakier of late. Better to lock in the better levels of protection sooner.
Idea #2: Think about migrating to a portfolio level put – or at least just a S&P500 put for your entire US Equity exposure. It will be easier to manage and you will find the most narrow bid/ask spreads when you enter the position. You should do this as long as your portfolio is mostly broad based ETFs or a collection of broad stocks. This is not a recommended approach if you have concentrated a large portion of your portfolio in one investment category, Lastly, this is a good approach if you are focused on catastrophe protection in the market – not specific protection from a sector or asset class.
Idea #3: Protection out to June of 2014 looks the most appealing to me right now. On the S&P500, any protection between 1500 and 1550 looks compelling to me. Those levels would be one year’s worth of protection at a price of between 5-6% annualized – which is within our acceptable range. And your protection would effectively start at between 5-7% downside. That is very tight protection.
Idea #4: Buy your protection on a day that the market is rallying or rebounds. You want the VIX to get back in the 15 to 16 range – so you can get fair prices for your protection.
Happy Hedging!

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