Uncle Bill

Five Sectors To Consider Shorting

One more comment. You are not hedging your $180,000 long-stock portfolio, which is heavily tech-laden, when you buy a few thousand dollars worth of puts on the home-mortgage sector. To mask the relative ineffectiveness of the "hedge," you focus on the percentage gain in the option. People should always be wary when profit/loss on options is listed in terms of the option price rather than the stock price.

Five Sectors To Consider Shorting

I didn't research your past trades, I just looked at your posts.

Here's what you said on Dec. 11: "A little over two weeks ago I placed an order to buy May 2007 puts on another mortgage lender New Century Financial (NEW) but unfortunately my order was not fulfilled. New Century Financial was mentioned in my November article, "Hedging The Economy", and is already up 44% since we added it to the model portfolio. As an alternative to New Century, I picked up the July 2007 $42.5 puts for Countrywide Financial last week and after the analyst downgrade on Friday, these puts are already up 27%." I thought you meant you missed out on New Century puts to cover the New Century stock that was up 44% in your portfolio, so you went to Countrywide puts instead. I guess you're saying you sold New Century and went short the industry by buying Countrywide puts. OK.

So you used puts on Countrywide to hedge a tech-stock portfolio, made $1.64 on each put and tell us that "we protected our model portfolio by hedging our long positions with put options."

My point is that your hedges had expired by the time the underlyig moved down. Your portfolio was exposed at exactly the time the mortgage sector was experiecing its worst moments.That's why I say your hedging claims are misleading. You're lucky the tech market hasn't gone down yet.

Five Sectors To Consider Shorting

"We protected our model portfolio by hedging our long positions with put options" is a misleading statement. While your fundamental analysis is solid as can be, your timing and application of options leaves something to be desired.

I looked back, and your post on Dec. 11 last year said you were buying the July 42 1/2 puts on Countrywide (CFC). That day, the stock closed at 40.48. The day you posted and said your July puts expired, the stock closed at 36.17. So your puts were worth 6.33 at expiry (42.5 - 36.17). But the options were nearly 2 points in the money when purchased, poiints you had to pay when you bought. That leaves 4.33 points, minus the premuim -- a couple points? -- you paid to hold those for six months. So you made maybe 3 points on the trade in six months. Then you were naked long the stock again in your model portfolio. Right before it tanked.

You also said you missed out on buying protective puts in New Century (no symbol). If you made a fundamental decision to hedge, why didn't you buy those on the offer?

It's important because of your final statement: "A half-point Fed cut may make the markets go up in response." When dealing with options, timing and application is more important than fundamentals.
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