We were overbought and that we're due for a correction. The overbought part was true, but no correction was in sight on the back of QE2. I don't like being short when the printing presses are on full steam, but I'll never flinch at taking a profit or even use some of them to put on some hedges... After all, would you buy a house without insurance?
I had specifically Alerted all My Clients in My November 22-28 report:
IMPortant Note: Many Stocks are showing weakness in Weekly charts which is a sign of bear market. At that time Nifty close was 6092 and with in 3 months Nifty made a low of 5175.
Option Strategies
How to hedge with Vertical Put Spreads (Bear Strategy)
Here we Buy Put option and Sell lower strike Put option.
How to hedge with Vertical Call Spreads (Bull Strategy)
Here we Buy Call option and Sell higher strike Call option.
Here the most important question is which strike price to buy and which to sell. This involves understanding the market dynamics to calculate profit targets and controlling losses in case market does the reverse.
Here we Buy Put option and Sell lower strike Put option.
How to hedge with Vertical Call Spreads (Bull Strategy)
Here we Buy Call option and Sell higher strike Call option.
Here the most important question is which strike price to buy and which to sell. This involves understanding the market dynamics to calculate profit targets and controlling losses in case market does the reverse.
I always say it's better to have insurance before your house burns down rather than try to buy it as it's burning down. This can also be said when talking about purchasing insurance or put options to hedge an equity portfolio. With the market up over 25% since early July and the market being quite complacent lately, volatility is relatively cheap making portfolio insurance or put options also relatively cheap. Many have been stating the market is overdue for a pull back, and I also believe a correction could occur whether it be worse than expected economic data in the United States, some bad news out of Europe or Asia, or even another flash crash that spikes fear in the markets, who knows what excuse the market will use to pull back, but it will likely find one soon as we all know trees don't grow to the sky. Another thing to remember is the more we rally before any type of pull back, the worse the pull back will likely be. A
25% move higher in just 6 months is certainly a gift and some of the profits made in the recent months should be set aside to hedge out the next few months, as I stated the greater the rally - the greater the correction is typically.
