Magazine article Modern Trader

The Aggressive Bull

Magazine article Modern Trader

The Aggressive Bull

Article excerpt

Option Strategy

The aggressive bull

The stock market has been shrugging off legitimate bearish signals and continues to react to anything remotely bullish, causing a floor mood much like that of early 1987.

If you had had advance knowledge in 1987 that a significant sell-off would occur somewhere down the road, what could you, as an options speculator, have done to capitalize on your expectation? Obviously, the position to have been holding in mid-October 1987 was long puts. However, such a position over the eight months of over-extension that preceded the October crash would have caused a serious drain on your account -- and you would have been discouraged about not participating in the rally.

Many think we now are in the early months of such a rally-then-break pattern, although perhaps a somewhat less dramatic one than 1987's. Profits in such a market can be made by those who remain bullish to profit from the trend while preparing to swing to bearish should a significant break occur.

The aggressive bull spread, with disaster insurance, creates just such a posture to the market.

In the standard bull spread, a long option trade is financed, in part, by writing a like option having a higher strike (usually, both are calls). In the aggressive version, you purchase a call and write a lower-strike put to finance the trade. This is a blatantly bullish position, with open-ended profit to the upside and open-ended loss to the downside. Its primary difference from a long futures position is that the market must decline substantially before any loss is realized or advance a great deal before any profit is recorded. …

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