S&P riskie

Bought 50 Dec SPZ6 1425 calls at 4.45
Sold 50 Dec SPZ6 1375 puts at 6.3

Strange things are afoot when housing starts collapse and bonds barely budge....
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November 20, 2006 at 8:17 AM ×

Strange things are afoot when housing starts collapse and people start selling puts on the stock market...

Macro Man
November 20, 2006 at 8:56 AM ×

Though this be madness, yet there is method in't. That housing starts were wretched is, I concur, beyond dispute. That it signals the impending doom of economic growth is. Housing starts, though often thought of as a leading indicator, actually lag sales. Which makes sense when you think about it; when builders shift more product, they respond by building more.

Going into the number, the portfolio had a subtantial amount of short equity index risk (short $10 mio DIA, short A$26 million worth of ASX futures.) Against this, there was $10 million worth of commodity-stock longs (75% energy, 25% gold.)

The greatest risk to the portfolio, therefore, was a straight-line rally in broad indices with no noticeable beta towards resource stocks. Given the puzzling reaction of stock, bond, and currency markets to economic data recently, it seemed prudent to slap a hedge on against the 'melt-up' scenario.

Frankly, the best thing for the portfolio would be for the SPX to settle at or even through the short strike, in which case the short ASX position becomes mostly a spread trade: short ASX, long SPX. If global growth is heading into the tank, that's not a bad position to have and provides a handy offset to the OIH and GG longs.