While the arguments go back and forth, inflation is definitely the winner for now. So while we get these signs of things going up, you might want to take shorter positions.
The latter part of the year could see the slowdown cause things to change. We just may see certain sectors react differently. If that is the case, we certainly will want to jump ship and reverse our thinking.
Still long natural resources and short the dollar until otherwise.
If you like calendars and diagonals, you may want to only go out 4-6 months on the long side. This will take much more diligence to follow, but it may help if the environment changes.
For those that like to be there first, selling put spreads 6 months out and 10% below market price on the financials may be a good gamble. Please remember that when you do these credit spreads, use an ETF. Many individual stocks may not be around and you may end up holding the bag. Whenever you use the 10% 6 month rule use baskets of stocks. Individual stocks can and do run up or down much more than 10%. The sectors usually do not.
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6 comments:
Dell, You're using a 6mth out credit spread on the financials because you think they will be on their way back up by then?
Debbie
A normal "correction" or bear market is typically 30%. Taking the XLF high 38.15 and using the math, 26.70 is 30% and it is now 24.32. So we are at or very near the bottom. This is not to say that other financials will not go bankrupt or out of business. But the sector as a whole has had a steep decline.
Now if you drop 10% below the 24 price you are at 21 and change. If you sell the March spread you get nothing for your efforts. But taking June, you can get .25 for a risk of 1.00 spread.
Dell, how abouthe 45 day or less rule for selling options? You just ignore that in this particular case?
When you are selling spreads the idea is that the underlying will not reach the short option. In order to get any return, you either have to set the strike cloes to the current underlying price or go out more months.
Now my preference is not to be as directional as I can. In order to do this I take a 10% strike away from the underlying. When you do this the current month will have no time value. You have to go out more months to collect any premium to make it worth your while.
This strategy is good for bottom fishing or topping out markets.
Classic is when the DOW or S&P run up over 20%. An ensuing correction is bound to happen since 20% is not a normal move. When it is going to happen I dont know. By going up 10% this is asking the S&P to go up 30%. Not a very likely event. In order to get any value in the premiums, you need to go out a few months to make it worth while.
If I understand correctly, you have a bull put spread in the money, 10% below the current price, a few months out?
I see what you say about having no premium in the trades for April vs June.
You have the just of it, However a point of clarification.
You wrote "If I understand correctly, you have a bull put spread IN THE MONEY", you are selling the spread 10% away from the strike price therefore it is out of the money by 10%
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