Condor Options

First of all, we would be amiss if we didn’t congratulate our readers, and especially our subscribers, on staying cool and collected yesterday.  It’s very easy to get swept up in the panic and the buzz and forget that the S&P 500 is only 20% off its all time high from back in October.  A 20% decline is standard bear market fare; a few large companies failing is standard bear market fare; and despite what all the financial media are saying (remember, they get paid to attract viewers and readers, so any buzz is good buzz for them), we have not yet seen anything that takes us beyond standard bear market fare.  While the events behind this decline are themselves history-making, the magnitude of this market action is not (yet).

That last “yet” is admittedly a big one.  In the very short term, it’s hard to see what series of events would turn this ship around, and technical analysts have plenty to be excited about, as there’s no short-term support level anywhere in sight.  And, despite what some political operatives may claim, the economy itself is not in good shape.  It has been deliberately neglected and horribly mismanaged by people who have put the interests of the wealthy deregulated few before the interests of the workers on whom this economy depends – and the problems we’re facing won’t be fixed overnight.

But that’s one reason why we trade non-directional strategies.  In times like these, some traders get busted, and others live to fight another day (and of course some make out like bandits!).  What separates the winners from the losers?  Keep these three survival techniques in mind:

1. Asset allocation is extremely important. Sizing your trades properly (i.e., small) and putting on many diverse trades, rather than a few large homogeneous ones, can make all the difference.
2. Rules are made to be followed. If you’ve spent years developing trading rules that work – whether they’re stop-loss conditions, entry and exit points, or whatever – these are the times that those rules are made for.  Rule-based decisions are no guarantee by themselves, but they are guaranteed to outperform whatever your emotions are telling you to do.
3. Leverage is a double-edged sword. You can only use the leverage inherent in options in one of two ways: to reduce risk or to increase risk.  If you trade appropriately-sized risk-defined spreads, you can reduce your risk considerably without giving up any upside (versus trading stocks).  Or you can use options to speculate and find ways to blow out your account faster than you thought possible.  In other words, leverage should not be a source of your nominal profits, it should be a risk-reduction tool.  Those who live by the sword tend to die by it.

As for specific signals and thoughts regarding the rest of this week, we’ll be posting our thoughts on the members-only blog.