Magazine article Modern Trader

Options Strategy

Magazine article Modern Trader

Options Strategy

Article excerpt

Question: How can you profit from a potentially strong bull move while protecting yourself from a second bear wave?

Answer: A ratio condor

Can anyone think of a good reason to throw caution to the wind and go long equities? Listening to the "experts" can leave you feeling tear and trepidation, even when the market is advancing. The only ones making serious money (without losing sleep) in recessions are psychiatrists prescribing Xanax.

The media is constantly comparing this recession to the Great Depression; however, this recession is nor that far from the mean of other recessions when measured by unemployment, duration and GDR FtM- example, unemployment was higher ( 1 0.8%) in the 1981-82 recession. If you combined that with the shorter 1980 recession, it was longer in duration, too (see Iutiuvsmag.com recession). There are plentv of reasons to be bullish:

* The markets can't seem to sell off, even on bad news.

* The markets are up an average of 8.9% on a normal year, but are up an average of over 27% during a post mid-term year.

* Historically, the best market advance was 44% (280.90 to 404.39). This happened in 1954 when we were in a recession.

* The worst part of our current recession involving banking, foreclosures and unemployment appears to be behind us.

Even an optimist can find it emotionally difficult to be long a market under these circumstances. And to be fair, the depth of the economic downturn must be measured against the extraordinär}' interventions undertaken (TARJ', quantitative easing, extended /ero rate policy, etc.) to prevent an all out depression. The bottom line is there are many very smart people who believe the worst is yet to come even though this is historically a good time to get long. The answer to that dilemma may be the ratio condor, which allows you to profit from your bullish bias and sleep at night.

In this strategy, we sell a vertical call spread to receive a premium that we can use to purchase a wider vertical call spread with extra units to provide maximum profit potential. …

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