Post by jeffolie on Feb 10, 2013 13:21:48 GMT -6
the hedge heard around the market
" ... AND LAST WEEK, TO HEDGE bank stocks through April, a major investor purchased about 100,000 Select Sector SPDR-Financial April 16 puts when that exchange-traded fund was around 17.60. The position—which we call the hedge heard around the market—sparked widespread discussion because the Select Sector SPDR-Financial has long been used by hedge funds to trade Europe's economic crisis.
The big money-center U.S. banks all have businesses in Europe, and the Select Sector SPDR-Financial can be used to bet against Europe. Depending on how you measure the relationship between the Select Sector SPDR-Financial and the CurrencyShares Euro Trust (FXE), the correlation is 76% to 85% and edging higher. The correlation between the S&P 500 ETF Trust (SPY) and the CurrencyShares Euro Trust stands around 85%.
my jeffolie view: one day does not make a trend, one hedge does not make a trend change, I continue to advocate trend following and ignoring individual signals standing alone.
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FEBRUARY 9, 2013
Traders Start Playing Defense
Larger Investors are quietly building defensive options positions as the stock market hovers around all-time highs. The "greed-in" and "risk-on" trade still dominates, but a nascent change is occurring as key market risks, particularly the threat of sequestration, loom menacingly ahead.
With the Standard & Poor's 500 inhaling thin oxygen around 1500, investors are bearishly positioning in financial and small-company stocks that have reacted poorly to Europe's economic and political unrest and the U.S. economy's malaise. Investors are buying puts, often in large size, on the Select Sector SPDR-Financial (XLF) and the iShares Russell 2000 Index (IWM). If stocks slide, they could force the parties on the other side to buy these exchange-traded funds at prices higher than those they'd be trading at.
The defensive positioning is broadly reflected in the CBOE Volatility Index (VIX), too. Though much has been made of the VIX's relatively sanguine levels, this fear gauge has quietly risen about 20% since slipping to a 52-week low in late January. This is happening even though stocks are mostly rallying; the VIX usually moves in the opposite direction of the S&P.
True, the defensive trading is thus far isolated and controlled, but it has occurred in such large size as to cause some investors to wonder if the stock market is too far ahead of itself, given what might be waiting at month's end.
Some would say such caution is normal, especially when hedging costs aren't terribly high and so many stocks and ETFs are at or near 52-week highs.
These people would be right. But the sheer size of some of the trades—in some cases, 100,000 Select Sector SPDR-Financial puts and 50,000 iShares Russell 2000 Index puts—at a time when so many individuals are so enthusiastic about stocks suggests major investors with large equity positions are suddenly beginning to worry about the market's lofty heights.
Call it the law of big size, but the options market has long paid attention to anyone who trades large numbers of puts and calls, on the simple assumption that such traders have better information than everyone else.
The federal budget is poised to be cut by $1 trillion on March 1, unless Congress reaches various deals to prevent sequestration, and what is expected to be a major disruption to the American economy. The iShares Russell 2000 Index is considered a pure play on the economy because small U.S. companies tend to only operate in the domestic marketplace. With the iShares Russell 2000 near a 52-week high of 90.69, one investor recently bought 50,000 April 86 puts and sold 50,000 April 84 puts.
AND LAST WEEK, TO HEDGE bank stocks through April, a major investor purchased about 100,000 Select Sector SPDR-Financial April 16 puts when that exchange-traded fund was around 17.60. The position—which we call the hedge heard around the market—sparked widespread discussion because the Select Sector SPDR-Financial has long been used by hedge funds to trade Europe's economic crisis.
The big money-center U.S. banks all have businesses in Europe, and the Select Sector SPDR-Financial can be used to bet against Europe. Depending on how you measure the relationship between the Select Sector SPDR-Financial and the CurrencyShares Euro Trust (FXE), the correlation is 76% to 85% and edging higher. The correlation between the S&P 500 ETF Trust (SPY) and the CurrencyShares Euro Trust stands around 85%.
Of course, correlation isn't causation, and maybe sequestration will prove to be a minor issue, and Europe will turn out to be nothing more than a bad story without any major immediate impact. But if you're willing to bet on the upside, what's wrong with a little downside wager, too?
online.barrons.com/article/SB50001424052748704372504578284083044727890.html?mod=BOL_twm_mw#articleTabs_article%3D2