Papale’s Market Pep Talk

By Steve Papale

I am a fan of Batman.  Not the movies, although I did enjoy some.  I’m talking about the original TV series back in the 60’s.  It seems however a group called the Automobile Legal Association was not too happy about the way Batman drove around in those days.  It issued  press release citing various citations including U turns in middle of busy streets, crashing through safety barriers, crossing highway white lines, parking illegally, speeding and failing to signal.  Wonder if they have seen “Fast and

Last week as markets were in a swoon due to uncertainty surrounding Greece and China I presented some basic strategies to protect yourself against a selloff or to go short the market.  Since my timely blog the SPX has risen about 60 points.  That was pretty much the bottom of this recent move.  So for those of us that are challenged when it comes to timing the markets, options can be a lifesaver.  In nearly every case, a bearish options position will lose less (as measured by dollars) than going short outright the underlying.

For example, buying a put spread slightly out of the money is a bearish play.  No matter how much the SPX rallies, all I can lose is my original debit.  And depending on how much time there is left until expiration, the spread may retain some significant value due to time premium.

Same thing with a long out of the money calendar.  Cost for putting this on is generally not large depending on how far out of the money we go and dollar risk is commensurate.  For those of us who have sold out of the money call spreads as bearish plays, again depending on strikes and time until expiration, they can even make money as markets rally.  Compare all those scenarios with going short an underlying.  Of course the dollar payoff may be larger when right but in the case where we are wrong losses can be also be large.  Hopefully risk management is in place to prevent large losses but the takeaway is that the P and L curve of most options strategies is much gentler than the underlying.  This is nothing new to experienced options traders especially if you analyze trades graphically.  Much over the years has been written about the levering benefits of options, that is how I can turn $1 into $10.  That is true but properly structured, they can be a safer way to trade as well.

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