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Friday, June 11, 2010

Zzzzzzzz ....

Man ... the equities markets have just ... died. And not to add to the current blatherpanic that is out there right now, but honestly ... if this is our June 'relief' rally ... then ... uhhh ...

I find the "buzz" of the last two weeks in the equities markets rather humorous though. Because if we get the slightest up day, I begin to hear how "dumb" the bears are. And the opposite holds true. If we are down 5 points on the SPX, then those "bulls sure must be delusional". All I know, is that as of today the VIX is falling.

Myself? Until we close above 1107 on the SPX, or close below 1040, then I'm not convinced one way or another. Everything else is just noise. As a matter of fact, it was that same noise that stopped my beautiful profit streak when it came to hedging out my dividend bearing stuff. For a while there, I was a hedging machine.

I'd purchase a hedging instrument ... it would turn out profitable, and I'd take my money.

Rinse.

Repeat.

Unfortunately, that can lead people to think that the hedging instrument itself should always be profitable. They're not, and they won't be. That's not the value of a hedge. The intrinsic value of a hedge, is that when you're worried, you can buy some insurance. But insurance policies aren't always cashed in. You are not making claims against your auto insurance every month, simply because you paid your auto insurance policy. You're not gathering cash on your homeowners insurance simply because you're all 'paid up'. So I repeat ...

The intrinsic value of using a hedging strategy as 'insurance' ... is that it is insurance.

Regardless, as I was saying ... I had bought an option as a hedge against the dividend bearing stuff some time ago. Since the market has traveled sideways however, it just destroyed the theta value on the option, so I had to sell it back to the market for a loss of 1.50 on the option. But I weighted myself appropriately, so I'm more than happy to pay the 'insurance premium' as it were.

Tomorrow is the "Week in Review" podcast ...

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 14 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.


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