It's Sunday evening before the Tuesday debt ceiling default deadline and index futures are up 1.4% on the prospect of a debt deal completing. For the time being it seems like we avoided catastrophe so I'll unwind my short positions throughout the week. I won't start however, until after it has passed the House (which has a handful of tea party fundamentalists) and could cause a last minute panic.
As of Friday evening, I had shorted ~12% of the portfolio using the SPY, while also hedging with August call options in the event that the market went up significantly on passing a debt deal. All in I'll likely lose under 1% on the position or ~0.1% for the portfolio just due to the premiums paid on the options and illiquidity of the option market.
That said, I also doubled my SWY bet to ~5% of the portfolio last week, so if it bounces a minimum of ~5% (which I think it easily can) the actions of the past week will all be awash.
I feel like I've gained two valuable lessons from this week:
The first is that I now have a better tool for heding the portfolio. If I'm concerned about a near-term sell-off or market turn down, I can take a hedged short position that has very limited downside risk (in this case ~0.2% to 1%). If I'm wrong, all I lose in the premium on the call options.
The second lesson is that while my bread and butter investing is from identifying and moving quickly on undervalued securities, if there's a significant macro-economic overhang nearly everything becomes correlated.
Disclosure: I'm short SPY and Long SWY.
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