A Top Investment Bank Just Made a Move to Protect Against Another S&P 500 Crash

dealmaker said:
UBS continues to be optimistic on stock markets this year. But, that hasn't stopped them from trying to protect against more volatile trading conditions.

ByBrian Sozzi
Feb25,20184:26PMEST

Just because a semblance of market tranquility has returned after February's early correction, it doesn't mean the waters will be smooth sailing into 2019.

Subsequently, investment bank UBS has sought to protect its clients in these choppier waters by purchasing a 10% out-of-the-money put option on theS&P 500. If the S&P 500 takes another dive, the position should become profitable. The bank says it may add to the position in coming months in order to diversify its strike prices.

"Should our base case of modestly higher inflation, measured Fed interest rate rises (one per quarter), and rising equity markets materialize, this position most likely will not be profitable," says UBS chief investment officer Mark Haefele. "Yet we think it is prudent to potentially sacrifice some of our expected returns in order to boost portfolio stability if fears of higher interest rates continue to impact markets."

Haefele says he has made no changes to UBS' existing equity positions.

"We have chosen to implement the position on the S&P 500, not because we have a particularly negative view on the U.S. market, but because the S&P 500 option market is the world's most liquid, and the index is a close proxy for global equities (U.S. equities represent 52% of global equities)," Haefele adds.

Somehow we think other investors aren't following UBS' lead here, which is sad given the wake-up callmarkets received earlier this month.

https://www.thestreet.com/story/144...otect-against-another-stock-market-crash.html
More...
This doesn't really make any sense. Under the volcker rule UBS can't engage in prop trading. So they wouldn't buy puts for the bank. They have thousands of clients, all with different needs and exposures, so doing some kind of bank-wide put buy "to protect its clients" is an idiotic statement to make. Did the reporter mean to say their wealth management group? Or is he just a moron?
 
Visaria said:
I haven't looked into it but i suspect that implied vol is very high on it.
More...

A high implied volatility is totally warranted when we have daily +1% moves...

Expensive compared to 2 months ago: yes... compared to the actual market situation... no.
 
The least expensive strategy for them and their clients is to buy mostly good dividend paying stocks with strong potential for capital gains and then make minimal changes in the portfolio over time. When corrections hit, simply do nothing other than to use them as an opportunity to put cash to work. Only make changes if there is a significant change in the long-term outlook for a particular holding. As the customers time horizon decreases move increasing portions of the portfolio to bonds. The portfolio manager has an obligation to their client to study, understand, and stay on top of macroeconomics. Have any of you heard this before? I hope so.
 
You must log in or register to reply here.
Back
Top