Yesterday, I posted a WSJ interview with Mark Cuban. Mark had a few very insightful ideas for the public including “buy and hold is a crock of s#$!” and “diversification is for idiots.” I definitely agree with Mark’s first statement – buy and hold is no longer a viable strategy. However, I think he needs to expand on his last statement. While I do agree that diversification in stocks is well, not useful when applied in the typical manner. Because most over-diversify. And quite honestly, I don’t bother investing in stocks. It ties up way too much of my capital and I can create far better statistical advantages using options rather than trying to guess how much a stock will appreciate over the long-term. It just doesn’t make sense to me. Diversifying options strategies does make sense to me. I will go into great detail in a future post.

Another complaint stems from a recent call by a I listened to by a small financial services firm. They were touting guaranteed returns with of course no risk. Really? Seriously? Their answer – fixed annuities. I had to laugh. And then I started to get upset. They were preying on the fear that the financial media has created over the past few weeks. They were taking advantage of hard-working, worried investors who lack the knowledge of how to effectively invest their money.

They went on to boast about how they were taking the steps necessary during these times of crisis by moving into more defensive stocks, etc. This was the best way to create a conservative portfolio. The insanity went on and on.

How about this – as an effective money manager learn how to appropriately and effectively use options to hedge your risk. The fact is, most active money managers have no idea how to use options other than buy out-of-money calls or puts. They don’t realize that times of crisis lead to above normal volatility that creates high options premium and the opportunity to make lots of profits. Why? I don’t know. Options are not that difficult. Yes, it takes a little hard work, but why not take the time to learn how to use options on your own. You are certainly not going to find an abundance of money managers who know to use options in an appropriate and effective way. So why not take the leap and learn.

Oh yeah, and what about the notion of cash is a position. I think we all know my thoughts on this topic.

People are starting to realize the benefits of options. They are catching on. I truly think the next 10-15 years are going to be revolutionary for options. I have already witnessed an enormous change in the options industry thanks to the likes of Tom Sosnoff, Thinkswim, Optionsxpress the CBOE. These are just a few of the major players trying to bring options to the mainstream and thankfully they are winning the battle.

Anyway, I have so much more to say, but I am not going to make this post long-winded as I always have tomorrow to rant.

Quick Thought on the Options Strategies

This is exactly how diversified options strategies should work.

While the High-Probability, Mean-Reversion Options Strategy sits idle, patiently waiting for short-term extremes, the Theta Driver Options Strategy is taking advantage of time decay.

It has taken some time, but I now feel as though I have created the perfect blend for my style of options trading. 

By employing both strategies I enjoy the benefits of trading a short-term, speculative options strategy alongside an options income strategy. Both are simple options strategies, yet very effective. Now that the High-Probability, Mean-Reversion strategy has hit a slow patch with no true signals over the past three weeks, you can start to see the true benefits of the Theta Driver strategy. Collecting premium, taking advantage of time decay by selling credit spreads offers income while I sit patiently for a short-term extreme to enter the market in one of the ETFs I follow for the strategy.

I might add one more options strategy to the mix, but for now I want to focus on teaching the High-Probability, Mean-Reversion Options Strategy and the Theta Driver Options Strategy.

Theta Driver Options Strategy

My first trade in the Theta Driver (trade entered on Monday 8/15) is already worth 7.5%. I will probably take it off if the market moves lower to take advantage of the growing premium created by increased market volatility. If I can buy the spread back for $0.05 or less over the coming days I will. I am always for locking in a profit and taking risk off the table. Especially, if better opportunities are available. Subscriber stay tuned!

High-Probability Options Strategy

More and more extremes have entered the market and a trade could be in the works over the next few trading days. If I do place a trade I will cut back my position-size. There are way too many uncertainies out there right now. And, of course, I want to see true short-term extremes before even thinking about placing a trade in this environment.

Market Mumbo Jumbo

• Daily options report
• Opposing views on BofA, Citi Options
• A Record High in the Options Market

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In trading patience is a requirement.

Several months ago I came across an article by a fellow trader named Mike Kestler. His statements coincide with the trading philosophy of the options strategies that I follow within my service and moreover, my trading style.

“Without patience traders get pulled into an endless cycle of over trading, sub par entry points and losing trades. Most traders get drawn into trades that do not fit their trading style because they are just plain bored and looking for something to trade. With patience, it is easier to have the courage and fortitude to execute the proper trade. If a trader has had the patience to stay away from the less than ideal setups, he or she will be able to have the strength and focus to execute on the higher probability trades. As a trader, you have to have the inner strength to pounce on the opportunity when it presents itself.”

Patience is the key. Opportunities are made up easier than losses, so if you let a few pass you by don’t dwell on what could have been. There will always be more opportunities around the corner. Remember, trading is a marathon and not a sprint.

I will continue to patiently wait for opportunities to arise and only trade scenarios where the probability is overwhelmingly on my side. That means trading extremes. This certainly does not guarantee a successful trade, but it definitely makes for a favorable one. This is evident in the performance of the ETF Extremes strategy that I have been following in this service for over two years.

• The NASDAQ 100 (QQQQ) closed near the highs of the day so we could potentially see a signal in the Gap Fade strategy on Monday of the market opens to the upside.

• Also, the Sector ETF Extremes begins on Monday. IF you would like to know more you can read about it here, or do not hesitate to email us. I traded this on a trial basis for my subscribers and the results were overwhelming. The foundation of the strategy rests on the same basic guidelines as the ETF Extremes but using sector ETFs as the underlyings of choice. This should make for a bit more action that the other two strategies that I currently follow so a sound position-sizing technique coupled with risk-management will be imperative for the long-term success of this strategy.
• Charles Kirk ponders the question “What do you do for a living?”

Have a wonderful and hopefully sunny weekend!

Andrew Crowder, Chief Options Strategist, Crowder Investment Research, LLC (www.crowderoptions.com)

Short-term Overbought/Oversold Levels for June 13, 2008

ETF Extremes Options Strategy

• S&P 500 (SPY) – 38.2 (neutral)
• Dow Jones (DIA) – 49.4 (neutral)
• Russell 2000 (IWM) – 51.1 (neutral)
• NASDAQ 100 (QQQQ) – 47.3 (neutral)

Sector ETF Extremes Options Strategy

• Biotech (IBB) – 47.8 (neutral)
• Consumer Discretionary (XLY) – 55.6 (neutral)
• Health Care (XLV) – 40.8 (neutral)
• Financial (XLF) – 47.3 (neutral)
• Energy (XLE) – 51.4 (neutral)
• Industrial (XLI) – 41.2 (neutral)
• Materials (XLB) – 56.2 (neutral
• Real Estate (IYR) – 48.2 (neutral)
• Retail (RTH) – 59.5 (neutral)
• Utilities (XLU) – 57.1 (neutral)

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