The world’s largest hedge fund has used options to establish a billion dollar bearish position. Is this a big bold prediction or merely a conservative, protective action?
According to an article in the Wall Street Journal Bridgewater Associates has accumulated a massive amount of put options tied to broad indices and ETFs like the SPDR 500 (SPY) and European Pro Shares (ULE) over the past through over the past few months.
The total commitment is $1.5 billion and is focused on options with a strike 5% below current levels and expire in the March time frame.
While this is grabbing headlines for the size and the fact that Bridgewater founder and CEO Ray Dalio has become increasingly vocal about ‘broken capitalism’ and a “world gone mad”, let’s put this position in the correct context. Bridgewater has some $150 billion in assets under management (AUM), so this is a mere 1% allocation.
It also is most likely a hedge against an overall portfolio which has a clear bullish bias, with an estimated 90% long vs. 25% short positions—the 115% total is due to leverage. The fact this leverage is down from 150% may be more telling than the put purchase.
Indeed, in the bigger picture the purchase of broad portfolio put protection seems nothing less than prudent.
U.S. equities are up 29% since last December lows and Euro based markets have had a big 15% run in just the past month.
With implied volatility, as measured by the CBOE Volatility Index, down to 12, a historically low level, put options are cheap making portfolio insurance relatively inexpensive and timely.
The time frame of the March 2020 expiration is also not random — March is significant in the Democratic primary because the party’s delegates will have been figured out by the end of that month.
Many on Wall Street have voiced fear that if Elizabeth Warren or one of the other far left candidates secures a nomination, it will be bad news for stocks.
As you can see, Bridgewater is not alone as wanting to guard against this outcome as put positions with the March expiration have been building.
The bottom line is I’ve often discussed how not to read too much into “unusual” option activity because you don’t know how it fits into an overall portfolio’s positioning.
And given that Bridgewater runs on a strict rules based model, I’d take this latest move as prudent protection, rather than a big bearish bet.
SPY shares were trading at $310.82 per share on Friday afternoon, up $0.55 (+0.18%). Year-to-date, SPY has gained 26.10%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Smith
Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...
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