Condor Options

Back in May, we wondered whether the peaceful upward climb of the markets was coming to an end. Although it took a little while for our thesis to play out, on July 23 we practically called the market top (without actually meaning to, of course). But now, the evident market weakness and enormous surge in [tag]volatility[/tag] have many people running scared. If this describes you, don’t worry: after another big hedge fund meltdown, professional and retail traders alike are wondering just how to handle this new [tag]market[/tag] environment.

Here are five reasons not to run away:

1. Recent selloffs aren’t actually that significant. Historically speaking, it’s common to see a major market [tag]correction[/tag] about every decade, and this market is well overdue. According to Pimco’s Bill Gross, a 5-10% correction in stocks would be justified at this point. In that context, the weakness we’ve seen over the past couple weeks may well be over, as the [tag]Dow[/tag] is already 5% off its highs. On the other hand:
2. A genuine correction is just a buying opportunity anyway. It may be that we’re heading into a genuine bear market - there are plenty of fundamental reasons to be pessimistic about the state of the U.S. economy, not least of which are the general economic mismanagement and complete lack of oversight perpetrated by the present administration (for more, see Kunstler’s “Vanishing Point”). But even if we’re in for a rocky ride, on a long-term view every major market dip has always been a great buying opportunity. While we’re permanent critics of the [tag]efficient market hypothesis[/tag], we also think that buy-and-hold is still the best long term investment strategy.
3. Market timing is a loser’s game. When you flee volatile markets, you make think you’re just “getting out” before something worse happens, but you’re actually still making a very specific bet: that during the time you’re away, the return on risk-free cash investments, minus the effects of [tag]inflation[/tag], will actually outperform the market averages. Do you really mean to take that bet? Even if you do, academic financial research has shown that the only people who can successfully and consistently time the markets are professionals using very sophisticated mathematical models. (If you have one of those market-beating mathematical models, can we come over and have a look?)
4. Market neutral strategies profit from confusing markets. Don’t be a bull or a bear, when you can be both and neither at the same time! On our site, we use [tag]market neutral[/tag] trading strategies to turn a profit regardless of whether the market goes up, down, or sideways. What we don’t know is where the market is going tomorrow (and nobody else does either); what we do know is that traders and fund managers and the big institutions will always have to cover their bets and shift their positions with every passing statistical breeze. And by taking market-neutral positions, we essentially “become the house” and sell time premium to everyone else, allowing us to sit back and let them worry about saving the market.
5. High volatility is a trader’s dream come true. The specific strategy we trade is called the [tag]iron condor[/tag], and it allows us to profit from the natural phenomenon of time decay. The little secret we’re burying at the end of this list is that:
   

   Periods of high volatility are literally the ideal time to trade iron condors.

   We’re just emerging from a period in which volatility has been at historic lows, meaning that traders and investors had become very complacent and even overconfident. Now, the surge in volatility premium means that some fear has come back into the picture, which is great for option traders like us. Essentially, trading iron condors is equivalent to shorting volatility - that is to say, selling fear. And when’s the best time to sell fear? When people are already afraid!

If you want to know more about what we do here at Condor [tag]Options[/tag], have a look around our site or just send us an email.

And whatever you do, don’t run from the markets out of panic and fear; profit from that fear by selling it.