Papale’s Market Pep Talk

When I was in school back in the 1970’s BC (before computers) I had something called a slide rule.  I never really understood how the thing worked totally but I was my responsibility to figure it out or do all math by hand.  Finally when calculators came out I either went out and bought one or did my math by hand.  My kids got home from their first day of school yesterday and they showed up with Google Chrome book and calculators that must have been developed by NASA based on all the buttons and symbols on the thing.  Turned out the school made them get them.  And guess who paid.  Yep that would be me.  I did some long hand math.  For what that stuff cost I could have bought 275 slide rules.

We are heading into the traditional long weekend marking the unofficial end to summer.  Personally I think we need to extend summer by another several weeks or months but that is another topic for another time.  September traditionally is the worst month of the year with an average return of -.64%.   For those who might be bearish, there are many ways to play a downward move in the market.  The VIX currently is around 12 and the market near an all time high so from that perspective, options are still relatively cheap.  So getting long some vega by buying an outright put or a put spread with both strikes out of the money may not be a bad play here.  Of course we all know that markets can stay high and VIX can stay low for long periods of time.  Another possibility is a long out of the money calendar or diagonal.

For example the OEX Sept/Oct 840 put spread is trading around $3.75.  It’s about 5% out of the money and long vega and if the market heads south between now and September expiration, it should do ok.

Finally, a backspead is another strategy that could work if a hard selloff should occur.   In this strategy you would sell one out of the money put and buy 2 slight more out of the money puts.  For example, sell 1 OEX 840 put and buy 2 OEX 830 put.  Risk here is if the market settles right at the long strike.  In that case the short put is in the money and the long puts are not worth anything.  Play around with the strikes for different risk/reward scenarios.

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