High-Probability, Mean-Reversion Indicator – Advantages of Diversified Options Strategies
August 18, 2011
Before I get started I want to discuss a lingering frustration of mine – the financial services arena.
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
If you haven’t already, don’t forget to sign-up for my Free 30-day trial.
Also, for those of you who live on Facebook. You can access my daily info on the social network as well. Just click on LIKE.
Underlying ETF Options Still In A Neutal State
June 17, 2008
The NASDAQ 100 (QQQQ) Gap Fade options strategy was extremely close to a signal at the open this morning, but unfortunately, QQQQ opened slightly below yesterday’s high. The last few trading days have been close calls for the the Gap Fade strategy as QQQQ has closed near session lows and highs. Today was no different as QQQQ closed near the session lows at $48.54, with the low being $48.47 so a lower open tomorrow coutld trigger a signal if the initial decline is deep enough to warrant a good risk/reward and therefore a trade. Subscribers to the strategy, as always, will receive a real-time trade alert when and if one occurs. As for the rest of you, well, I will inform you here (at the daily options blog) of any trade and the success/failure of the trade.
As for the other sectors I follow in the overbought/oversold section below, every single one is in a neutral state so I will remain patiently on the sidelines, sitting on hands, until the Mr. Probability shifts in my favor.
I would like to thank all of you you have commented on the new format and the options strategies I follow. I hope to bring you more continued success in the future as I am in this for the long-term and I hope you are as well. We build wealth slowly here as I use a simple, yet effective options strategies that have proven the test of time. Hopefully, the new Sector ETF Extremes will folow in the footsteps of our flagship strategy the ETF Extremes which has made over 150% since its inception over two years ago. During that same time frame the S&P 500 has gained barely over 10%.
I do not claim to make outlandish gains and trade fairly infrequently which is why my strategies are so reasonably priced. Furthermore, like many of the other options strategies that are used by others, my strategies are not exposed to the market every day. Actually my strategies are typically only exposed to the market a few days a month. The performance of the ETF Extremes options strategy has proven that trading less often produces better results. Give the strategy a try. If you are not 100% thrilled then do not hesitate to email within 30 days and we will refund your money immediately.
Overbought/Oversold Levels for June 17th, 2008
ETF Extremes Options Strategy
- S&P 500 (SPY) – 41.5 (neutral)
- Dow Jones (DIA) – 38.6 (neutral)
- Russell 2000 (IWM) – 55.7 (neutral)
- NASDAQ 100 (QQQQ) – 49.5 (neutral)
Sector ETF Extremes Options Strategy
- Biotech (IBB) – 45.1 (neutral)
- Consumer Discretionary (XLY) – 43.6 (neutral)
- Health Care (XLV) – 42.1 (neutral)
- Financial (XLF) – 37.2 (neutral)
- Energy (XLE) – 63.8 (neutral)
- Industrial (XLI) – 34.8 (neutral)
- Materials (XLB) – 55.3 (neutral
- Real Estate (IYR) – 59.8 (neutral)
- Retail (RTH) – 45.1 (neutral)
- Utilities (XLU) – 65.6 (neutral)
If you would like to follow my strategies with real-time alerts or have them autotraded by a participating broker please click the following link: SUBSCRIBE
