Archive for March 6th, 2013

The Ultimate Put

The best way to protect your long position is to buy puts against it. This can be done on an individual position or an entire portfolio. But, if I have learned anything in this market environment it is that my thought that options are the ultimate hedge was never correct. The real ultimate hedge, as it is today, is the US Federal Reserve Bank…..The Fed!

Ever since the Financial Crisis, the Fed has been bailing people out, pumping money into the economy and now buying every piece of US Government Debt that they can get their hands on.  They need to buy to keep interest rates at near zero and have promised to do so through 2014 and possibly longer. This tactic has the effect of a put on the market that allows for huge downside protection like a real put would. All dips are suddenly buying opportunities because there is nowhere else to put your money.

But, it is more than that just that. With the Fed buying so much of this debt at ridiculously low levels for an obscenely long period of time, the Fed is creating an opportunity for bond traders. This is what makes this the ultimate put. You see, the long term buying of the debt at such low rates gives traders the chance to short the debt securities with the very high probability that the bonds and bills will decrease in value as rates go up and that is very likely down the road.

Shorting these securities puts money in their accounts…… they need to put to work. And with rates so low, the money managers have only the stock market to put the money into to create any kind of acceptable returns. With all of this additional money going into the market, it would be very difficult for it to go down.

Wow, that is one hell of a put! It is the Ultimate put! It is the Fed that is the Ultimate Put!