-- Posted Monday, 20 February 2006 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Monday, February 20, 2006
For investors who’d rather be smart than lucky
Like so many of you, I like to hold a few put options in inventory each month “just in case.” You never know. Suppose investors were to awaken one morning troubled by doubts about the health of the economy? I’m not suggesting that such a thing is likely to happen, mind you, only that we should take the odds if they’re juicy enough. Well, we’ve actually taken odds that were plenty juicy in each of the last three expiration periods, only to see our put options waste away to nothing.
Most recently, as the January series was expiring, we legged into a February put spread in the QQQs at no cost , buying sixty-four of the Feb 40 puts and shorting an equal number of Feb 39 puts against them a few days later for the same price.
This was no long shot bet on a crash, either. More like a $2 bet on a strong favorite to place or show. In effect, we were betting that within the next thirty days, the QQQs would fall just three percent. That’s where we would have started to make some money, at the rate of $64 for each 0.01 decline in the underlying security. Our maximum gain would have come on a decline of 5.5 percent or more, so that anything below $39 would have yielded a $6,400 trading profit. Not bad, considering there was no risk at the outset. But in fact there eventually was risk, since we added twenty Feb 42 calls to our position, seduced by some bullish head-fakes in the broad averages. Alas, they were never quite so bullish as to afford us a gainful exit from the calls; nor were the swoons precipitous enough to alleviate the steady attrition of our puts.
No question, this is one tough market – one that has become so thoroughly dominated by mechanical trading that it seems absolutely inured to the real world. But then, what should we expect when a hundred-thousand fiercely competitive algorithms slug it out each day, each one of them trying to extract profits from the smallest movements in price. The result is that stocks have ceased to move – or at least, to move sufficiently to shake the money tree vigorously enough to reward boldness, much less mere cleverness. That’s why some of the savviest hedge-fund managers have been turning money down. How do you handicap a stock market that has been marking time for nearly seven years?
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Monday, 20 February 2006 | Digg This Article | Source: GoldSeek.com
