This is a selfish and a selfless post. It is selfish in the respect that I’m hoping to glean some wisdom from the crowd. It is selfless since it’s a decent amount of work to construct this properly, with the hope that some folks might benefit from the problem and its potential solutions.
Let me start with the situation and my assumptions:
- I have a substantial portfolio which consists of only cash and 30 bearish equity positions, by way of being long puts that expire no earlier than September and, on most cases, expire much later than that.
- I have 20% of my portfolio in cash. The portfolio overall is sporting a 57% profit so far this year.
- Over the past few weeks, I saw about 90% of my profits for the year go up in smoke, only to be restored over the course of the past few days (please note: it was not a good feeling, and I’d rather not go there again);
- My overarching assumption is that stocks will be MUCH lower at some point this year (prior to October) and, counter-trend rallies be damned, virtually all these puts will be worth much more later, even with time decay.
So, armed with those assumptions, allow me to share four distinct game plans and get your thoughts (including, of course, other approaches I’m not considering).
Strategy One: Don’t Do a Damned Thing
Before FOMC: Don’t do a thing. Just sit tight. Midget porn. You know the drill.
After FOMC: If the market starts falling, great. Maybe look to deploy more cash. If the market is rising, start cutting loose positions that seem most vulnerable, thereby raising cash and reducing risk of further damage.
Advantages: Simple.
Disadvantages: Leaves me vulnerable to huge rally taking a huge bite out of my profits in a big hurry, and bailing on positions isn’t much of a defense.
Strategy Two: Go Long As a Hedge
Before FOMC: Acquire a decent-sized bullish position but with a more aggressive timeframe. For example, go long August SPY calls, and dedicate most of my cash to that one position.
After FOMC: If the market goes flying higher, hurray, this will take away some of the pain. If the market goes into a free-fall, I’ll need to sell it at a loss and basically consider it an insurance premium.
Advantages: Mitigates risk if the market goes flying higher, plus, psychologically, makes it easier for me to stand fast on the short positions for the long haul.
Disadvantages: If the market starts moving lower, I’ll have generated a new loss for myself that I would not have had if I simply kept it in cash. Plus, as crazy as post-FOMC trading is, I could get whipsawed out of the thing only to see it go flying higher later..
Strategy Three: Raise More Cash and Wait
Before FOMC: Go through the aforementioned 30 positions and exit any which have seem to have pretty much had their run (unless the market just goes plunging).
After FOMC: Re-assess and, where appropriate, enter select positions with good risk/reward ratios.
Advantages: Reduces risk to some degree.
Disadvantages: Eliminates opportunity on positions which, by their very nature, are my favorite picks.
Strategy Four: Get Totally Out!
Before FOMC: Just get out of every single position and go totally into cash.
After FOMC: Either pat myself on the back (if the market bolts higher) or climb on top of the roof and consider jumping (if the market plunges).
Advantages: Takes risk to absolutely nothing.
Disadvantages: Takes opportunity to absolutely nothing.
There’s clearly no perfect answer (markets always equal risk!) but I’d eager to hear your thoughts and ideas. Because, honestly, at this point, I’m not entirely sure how I’ll be conducting myself.
