We added to a put position on Friday with the purchase of some out-of-the-moneys that expire in three weeks. This is a longshot bet, since the S&Ps would need to fall by nearly 8% for the spread to go in-the-money. But the most we can lose at this point is $4 — that’s right, four measly dollars! — with a shot at making as much as $10,000 if the S&Ps should drop by 10% or more. Not bad odds, really, and we may be able to improve them if stocks drop only moderately next week. That would allow us to leg into vertical bears spreads with zero risk, or possibly even a guaranteed profit no matter what happens between now and October 21.
A Perpetual Motion Machine?
It is true that our bet goes against a global tide of funny money that has been pouring into stocks with increasingly heedless abandon. The result is a bull market that has been chugging along since March 2009, and which may seem by now to be a kind of economic perpetual motion machine. For as we know, much of the buying is being done by companies who have used trillions in borrowed funny money, as well as their own, otherwise useless, spare cash to buy up their own shares. This has had the effect of raising earnings multiples without requiring any actual growth in business. Voila! Stocks rise, year-end bonuses fatten, warrants push above exercise prices and everyone is happy. In point of fact, however, no bear market has ever begun when ebullience similar to what investors must have been feeling on Friday, was not at a giddy crest. And while giddiness might not be particularly useful for precisely timing the onset of a bear market, it most surely justifies making bets like the one described above. Visit our 24/7 chat room and share timely ideas and real-time results with great traders from around the world. Click on the link for a free trial subscription
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