This year, it’s all about risk control.
Ignore it at you peril.
So I thought it timely to review trade structures that allow you to maximize your profits, while minimizing your risk.
Again, the hard-earned lesson is to take the small profits as long as we are living in a minuscule 3% trading range for the major market indexes.
Pigs are getting slaughtered by the pen full.
This year, it seems like every market move is intended to cause maximum damaged to hedge funds, regardless of the logic.
From here, that means stocks could go up just enough to trigger another wave of stop loss buying, and then fail again.
A summer swoon is still in the cards, especially if the Russia revelations grow from here, or poor Q2 earnings slow down US economic growth.
A human would be mad to buy stocks up here at the top of an eight-year rally, but machines don’t care.
That is giving us our added upside volatility.
The algorithms will take advantage of this poor summer liquidity to whipsaw prices as much as they can, capturing as many pennies as possible.
A good rule of thumb in 2016 is to always wait an extra day before strapping on a new position.
Prices always move more than you expect, even though it is not reflected in the Volatility Index (VIX).
Last week, we captured a profit in our position in the iShares Barclays 20+ Year Treasury Bond Fund (TLT) July, 2017 $130-$133 in-the-money vertical bear put spread.
In this particular example, we bought the (TLT) July, 2017 $133 put option, and sold short the (TLT) July, 2017 $130 put option against it, thus setting up a perfect hedge.
This was a bet that the (TLT) would fall, move sideways, or rise modestly into the July 21 expiration.
That’s exactly what we got.
In the following weeks, the (TLT) plunged some five points.
The great thing about options spreads is that the minute to minute price movement is small enough to enable readers to get in and out even after transmission delays posed by the Internet.
You don’t need to live your life in front of a screen grasping for pennies.
Buy stocks, or options outright, and it is a totally different story. These securities can move by miles before you have a chance to get an order executed.
You also have clearly defined risk with an options spread. You can’t lose any more money than you put in.
And if Armageddon hits, time value assures that you can always recover much of your investment.
And here is another big advantage of option spreads.
You make your maximum profit even when the market does absolutely nothing, which it is prone to do over long periods over the summer.
There is nothing better than getting paid, even when you are wrong.
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