Maybe UBS Should Have Called It NO!
It never fails. The lure of easy money selling naked options has proven time after time to be a loser. Perhaps you recall a firm called Bear Sterns or Lehman Brothers, Long Term Capital or the Granddaddy of them all AIG. These companies employed some of the best and brightest minds in the financial industry. But the geniuses that ran the risk division forgot the oldest term in investing. Eventually the impossible will happen and when it does you will lose all the money you made selling options and a lot more. Just ask Long Term Capital which was the hottest option firm of all.
Long Term Capital employed a lot of PHD’s from the top universities in the country to create a “new pricing’ model that the street was sure couldn’t fail. The first two years went great and the new pricing model had outstanding returns. Then it got more involved in illiquid assets and you probably know the rest to the story. It was so big by then that when the Russian Ruble had a hiccup it almost took down the international banking system. The FED finally had to bail them out.
As always, a new set of Ph.D.’s came up with a fool proof idea that they would use to create a product called “YES” which was offered by UBS. .This time it had a long track record of winning free money. They went to their wealthiest clients and raised about $5-$6 billion. The clients had to have a minimum net worth of $5 million to get in the program. All the clients signed documents that said it was possible to lose a substantial portion of their portfolio if things didn’t go as well as planned.
They didn’t go right. YES, was selling wide strangles . If a stock is trading at $100, the 100.0 strike is known as the at the money (ATM) and both the put and the call have a 50% chance of ending up in the money, so they have the most premium in them. If the serial you were selling closes exactly at $100 you collect all of the premium. However, what happens if the price closes at $150 and you sold a $80 -$120 strangle. On the $80 side you collect the premium but unfortunately on the $120 side of the market you get hammered. If a number of these trades occur, the strategy falls apart and everyone loses a substantial portion of their risk capital. Remember if you want to take advantage of time decay, sell spreads; naked options will eventually catch up with you!
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph which will cover the trading subject.
Question: Someone told me I can sell credit put spreads to hedge my portfolio is that right?
Answer: As the option markets have evolved over the past 25-years, the use of weekly options has gained acceptance. This allows many investors the chance to use vertical weekly credit put spreads in combination with longer based serial puts to create a synthetic short position in the market that has very little or no time decay. This wasn’t possible even five years ago, but it is now a strategy that I teach to students that want to learn advanced trading and protect their individual stocks or entire portfolio from downside risk.
The Wise Guy Report: The View From The Floor
Each week I talk about what I think the Wise Guys (floor traders) are up to with the Big Three commodity contracts: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). I also track the Market Edge (www.marketedge.com) ‘Market Posture’ which has a twenty-six year record of forecasting the intermediate-term direction of the stock market as measure by the DJIA with around 70% accuracy.
T-Notes
T-Notes finally popped with the announcement of the first interest cut in ten years, but how much further do they have to go? This market looks like a knee jerk reaction that is about to end in a blow off top. Rates will not stay at these levels forever. On Thursday panic buying drove the ten year to three year highs and I got short at 130.50. It may be too early, but the mortgage market is back to 2% and it is doubtful it will go much lower. I think the bubble will burst.
Crude Oil
Near term bottoms are still holding and until they are violated I will continue to play this market from the long side. This was a tough week as the market continued to churn in a wide price range. On Tuesday the market looked like it was going to break on the long side but could not hold those levels and for the second straight week closed with a selloff.
Gold
Gold seems to have stalled out at near current highs. Even with the currency wars drawing all of the attention the shiny metal doesn’t seem to be able to push past recent highs. This chart pattern looks like a potential blow off and I am going to continue to play this market from the short side until proven wrong.
|
The Big Three Commodities Contracts
|
The Market Edge Market Posture
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||
| Cyclical Trend Index (CTI): | -12 | -6 | Negative | ||||
| Momentum Index: | -4 | 0 | Negative | ||||
| Sentiment Index: | 1 | 0 | Neutral | ||||
| Strength Index – DJIA (DIA): | 1.0 | 1.0 | Negative | ||||
| Strength Index – NASDAQ 100 (QQQ): | 5.9 | 14.7 | Negative | ||||
| Strength Index – S&P 100 (OEX): | 8.2 | 13.4 | Negative | ||||
The Market Edge ‘Market Posture’, which has been Bearish since the week ending 08/02/2019 (DJIA 26485.01) remains Bearish at this time.
FREE Two-Week Trial Subscription
The option Trades and Strategies offered by the Optionomics Group are unique in that they all have limited risk while creating great leverage. Our basic Bullish – Bearish Credit Spread Trade lets you control 100 shares of a $200 stock, a $20,000 position for less than $500 or 40:1 leverage. Your maximum risk is always limited and our strategies produce winning trades in three out of four possible outcomes. Check out The Scoreboard on the home page to see our results.
Optionomics let you become the casino whereby you have a mathematical edge that enables you to grind out consistent returns. These strategies are designed to produce good returns over short to intermediate-term time frames in any type of market environment.
Optionomics offers a FREE Two-Week trial to its entire web site with no cost or strings attached. Each of the strategies are explained in a 5-7 page booklet which includes detailed explanations and sample recommendations. You can see how the strategies are performing every week by clicking on The Scoreboard tab on the Home page. During the trial, you can paper trade the various strategies and get a feel for the deal without risking a penny. Simply click on the appropriate tab on the Optionomics’ Home page to access the informative booklets and then sign up for the trail. As a special offer, you can download a FREE copy of my latest book, “Trading Options My Way”. I doubt that you have ever read anything like this.
The ‘Traders’ Subscription Includes The Following:
- The Bullish – Bearish Credit Spread Trade: A basic strategy to trading weekly credit spreads.
- The One Day Wonder Trade: A one day trade with great consistency and upside potential.
- The Blow Off Top – Bottom Trade: A lot of action and big moves too.
- The Earnings Season Trade: Potential big movers with little or no downside risk.
The ‘Investors’ Subscription Includes The Following:
- The 21st Century Covered Call Strategy: A modern day alternative to the old fashioned covered call strategy.
- The Low Cost Put-Call Hedge Strategy: Sleep at night knowing your portfolio is protected for little or no cost.
- The Billionaire Risk Reverse Strategy: Big time leverage – small time risk.
Each Monday morning by 11:00 EST, the recommendations for each strategy are posted on the Optionomics’ web site. In addition, the updated results from the previous week are posted on the Optionomics’ Scoreboard. I also have a webinar on Thursday afternoon where I discuss various option strategies, what is happening on the trading floors and answer any questions that you may have. Don’t worry if you miss the show. They are archived on the site. Sound Good? Good! You can subscribe to either the Traders or the Investor plans at an introductory special of only $39.95 each per month on a month to month basis with no contract or strings attached. That’s $10.00 off the regular subscription rate ($49.95). If you subscribe to both it is only $64.95 per month. I think you will agree that this is a super offer so give it a try. Go to www.optionomicsgroup.com and get started today doing what the pros do –
“Don’t Buy Them – Sell Them”.
Mr. Seifert