Amidst all of that uncertainty are two specific trends that any options trader should pay very close attention to. For starters, the market is in a period of transition to a bear cycle that will most likely last for quarters and possibly years.
The closest comparison to today’s conditions would be the 1970’s. At that time, the S&P 500 moved lower by 35%. Thus far, in what is technically a correction, the S&P 500 has only dropped by 15%.
That means there is still the potential for more downside. Traders using options should be able to invest in confidence in the downward movement of the market during this time for big-time profits.
The second trend relates to bubbles. It would seem that we have progressed through the last 10 years by moving from one bubble to the next. First was the dot-com bubble, followed by the housing/credit bubble, and now we are seeing a bubble in commodity prices.
One certainty is that these bubbles ultimately collapsed. Lots of money can be made as the air is released from the bubble. Of course the opposite is true if one bets short when the bubble is still inflating.
It is a tricky dance for certain.
That’s where options can play a role. Our own Ken Trester and his Maximum Options is a great way to deploy a bear market strategy with a focus on markets in a bubble.
In his most recent writing, Ken suggests betting against oil refiner Sunoco (SUN) by recommending the May 50 put (SUNQJ). According to Ken, the stock is poised for another test of its $48 floor with an expectation of breaking that floor price in the near future.
After dropping below the $50 mark earlier this month, the stock recovered nicely. The entire refining sector has fallen significantly thus far in 2008 and is most definitely in bear territory.
There is a lot of volatility and swings with this stock, hence the opportunity to profit with options. Here Trester is betting on the deflating of the oil bubble. If that bubble is still inflating, he suggests closing out the position if the stock closes above $59 per share.
These types of trades are not for the faint of heart. In Maximum Options, the recommendation is to use tight stop/losses to protect capital. Because of the leverage, winning trades can dwarf a losing trade by a wide margin.
That makes it easier to swallow a loss moving on to the next trade. If it’s a winner, those losses will be long forgotten. That’s how Wall Street makes its money, and it can be the same for you and your portfolio with options trading.
Let Ken Trester’s Maximum Options show you the way!
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