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Pro: Now Is the Time to Hedge

It's time to hedge my stock portfolio. The futures market is a great place to help reduce overall market risk, and I want to protect my downside risk in equities for the next 30 days.

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Equities enjoyed a tremendously strong close on Wednesday, after recovering from an early morning bath. Optimistic comments from lawmakers sparked buying after an early morning sell-off. The S&P 500 index traded down to a low of 1,383, but recovered and closed more than 20 points from the lows. It is sad, but this market is taking daily swings on the comments of those in power here in the U.S. Still, it is true that our economy cannot handle finishing the year without a budget deal. One trader said it best yesterday: "This is not a market, it's a casino — have fun."

The momentum has continued Thursday morning, as the S&P has miraculously been able to test my weekly target. The high overnight was 1,416.75. However, the .618 retracement on the yearly highs to the recent 1,340.25 lows comes in at 1,419.25, and this will present a tremendous barrier. I do not expect to see the 1,419.25 level broken in the near future. However, a close above 1,420 could send this market off to the races. The 50-day moving average comes in at 1,416, and I expect a little profit-taking at this level. Support will now be 1,407.50. Only a close back below the 100 day moving average at 1,402.50, and the big psychological level of 1,400, can kill any momentum built.

So what's my plan?

I want to hedge my stock portfolio against sharp spikes in volatility and protect my downside risk (keep in mind that I am only hedging a portion of my portfolio). I am buying E-mini S&P puts – in this case, I am looking at the January 15 1,405-strike puts at 25 points My max risk is $1,250, and the option gives me 51 days of protection. In the case of an early fiscal cliff deal, I will cut the position.


(Read More: 10 Things You Need to Know to Trade Futures)

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