On Nov 21, 2010 I wrote that the market should find some near-term support in the 1175 area and I had expected the market to the highs of the year (1220-1230) in the near term. The S&P500 did exactly that and have been able to rally more than 3% in the last two trading sessions. At the time of writing (1:00 PM on Dec 02, 2010) the index is at 1218-level, very close to the resistance. Please watch this level carefully. A breakout above the 1220-1230 area could trigger further year-end rally. On the flip side, a pullback from this level will take us back to the range-based trading. If you do not want to trim your long exposure, you may buy protection for cheap now (the VIX is trading at 19.38 at the time of writing, down from ~ 24 in just 2 days of trading).
Question: “Trim your long-term exposure, buy protection now for cheap”
–> If we buy puts against our long term holdings for cheap now as you say, and if the market goes down, are you trying to say that our puts’ rise in value will help in the loss of the stock?
Thanks!
@ Vish: What I meant is that if you do not want to trim your *long* exposure (not long-term), you may want to buy protection (i.e., Put) for cheap now. The Put could either be on the specific stock (to get direct protection) or the overall market (in case you have a portfolio of several stocks with beta ~ 1). In the latter case, where you could buy Puts on SPY (the ETF tracking the performance of S&P500 index), if the market goes down, the rise in value of the SPY Put will offset some of the losses in your overall portfolio due to individual stock’s price depreciation. However, it should be noted that if your portfolio has only a few stocks with very high beta, then it is probably better to get protection (Puts) for individual stocks.