Condor Options

Times like this are tough for traders who insist that their positions have some kind of story supporting them. Technology is strong and probably always will be, but it’s not going back to dotcom levels; China, everybody’s favorite narrative for this decade, seems sort of broken; the agriculture and solar stocks look ready to return to earth after a high-flying run; even oil is looking overextended. And it’s still not safe to talk about real estate or financial stocks.

Tim Knight is looking for some dollar strength in the near future, which would be some bearish news for oil (finally), since oil is priced in USD. Click through for his charts.

John Hussman is also looking for cheaper oil in the near future, taking his cue from contango in the crude futures.

But who needs a fundamental story when there are so many other ways to generate alpha? In the FT today, James Altucher mentions one of our favorite ways (obviously):

Puts, and sometimes calls, are usually mispriced. There’s the old adage that 90 per cent of options expire worthless, so the seller of options often benefits. This is true if the profit potential is greater than nine to one (your loss, on average, should not exceed nine times your profit potential). The seller of naked options is essentially a mini-insurance company, providing insurance against the risk of market disaster in either direction. Like an insurance company, the key to survival is managing risk. Don’t insure houses in Florida against the risk of hurricane next year. Sell spreads, sell strangles, cover risk on the upside and downside, don’t let the maximum risk exceed four times the hoped-for profit and model the probabilities of various market moves, giving yourself a buffer since none of those statistics will be accurate (the market is more akin to the modelling of earthquakes than the modelling of a class’s grades).

That’s really the heart of the strategies we follow around here: iron condors, calendar spreads, and double diagonals are all about selling short-term insurance in one way or another. And it isn’t enough to sell the insurance (i.e. short options) alone – you have to be adequately hedged, a concept that retail traders seem able to grasp and to execute quite well, but which, if the financial news is any guide, continues to elude so many fund managers and institutional desks. (We kid because we love; it’s hard to hedge risk from products that you don’t even understand in the first place. But then, nobody made you buy all those CDOs, did they?)

Reversal Readings

Markets worked off those oversold conditions quite well today, and are largely back to neutral territory.
DIA – 58.58
IWM – 76.63
SPY – 58.51
QQQQ – 90.00
EEM – Emerging markets – 5.17
XLE – Energy – 1.42
EWZ – Brazil – 1.16
XLB – Materials – 0.83
GLD – Gold – 6.67
PBW – Clean energy – 1.71
SLX – Silver – 0.33

We entered a third position for June today in the newsletter, a quiet little QQQQ position, and our other June trades are still in excellent shape.