Hedging the Hedge

Natural caution drove me to hedge last week, as I mentioned in a comment.

I bought the 2x real estate inverse ETF that trades under symbol SRS and the 3x financial inverse FAZ, following the logic that financials and real estate had gone too far, too fast in this year-long rally.

Silly me.

It only took a few trading days for these ETFs to exact a painful price for my caution.

Probably I should have just taken my lumps and sold, using the Alfred E. Neuman approach….

But I think the second round of layoffs is just getting started. States and cities that didn’t have to lay off employees because of last year’s stimulus are starting to do so now.  Private companies have taken their stimulus tax deals and stashed them away, with no intention whatsoever of hiring until the worst is truly, definitely over.

Outsourcing offshore and downsizing continue, even for things like jet engines that you might think were important to national security.

Today I took the unusual step of writing long-dated calls against my badly-timed purchase of SRS.  Even though the trading mechanics of this daily double reverse ETF argue that holding over any longer term than a few days has a natural disadvantage (compounding of doubled daily returns doesn’t equal doubling the underlying move over time), I still feel very exposed to real estate with my holdings in GKK and ABR, and even C.

The January $7.5’s on SRS were bid at 89 cents, so call it 87 cents after commission.  Since I paid $6.34 for these shares last week and then watched them decline to $6, having them called away at $7.50 next January wouldn’t be so bad.

After all, I’m still fundamentally bearish on the economy, given the gridlock by design that we have in Washington, and  the easily manipulated public that is likely to put the same guys in charge next November that made the mess in the first place.  I guess it wasn’t worth trying another approach, considering how well the neocon economic theories performed.  Let’s just try it again and hope we get different results.

At least I’ll have some stock bought from me for $7.50 that cost only $5.52 after commissions and option sale, a 10-month holding period return of roughly 35%.  On the other hand, the market could continue marching upward, but I can’t give you any reason why.



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