Banking Options

So true
Funny how it seems
Always in time
Bet never in line for dreams
--Spandau Ballet

Major indexes put in their worst week since last October. Among the weakest sectors has been the financials. The bank index (BKX) has broken its uptrend from last fall.

Inspired by a couple of recent Stan Druckenmiller interviews, I have been thinking about what a modest short portfolio might look like to hedge against my investment longs. I concluded that a modest group of options (some in indexes and some in individual names) might be prudent for my taxable account in this environment. 

The financial sector seemed like a good sector for an initial project. Huge run up. Vulnerable in 'risk off' environments. Interesting characteristics of price movement in sector indexes (low short term volatility, but potentially high long term volatility). So I initiated a small put option position in the financial sector SPDR (XLF). Although I have a fair amount of option experience, it's been a while. Wanted to see how it felt.

Trading options is much easier these days. Narrower bid/ask. Much lower commissions. Can see why options have become so popular. Can also see why many folks quickly get into lots of trouble. Derivatives constitute another form of leverage. Gains are magnified, but so are losses.

Used in moderation, however, options can be a tool for managing some of the risk associated with a long-term stock portfolio. So far, feels like a good tool for me to use in this environment.

position in XLF