How to Sell High and Buy Low in This Tumultuous Market
NEW YORK (TheStreet) -- Leave it to the media to spoil the stock market's mood.
After being inundated with television station showing protests turning violent in Spain, and additional protests slated to begin in Athens on Wednesday along with a general strike, one can't help to become fearful of what the future holds. Even with the European Central Bank implementing its "unlimited" bond-buying program, I can't help but think that the euro is nothing more than a broken instrument, doomed to failure because of economic inequalities that exist in the bloc. I simply can't imagine a solution coming soon.
In addition, our Fed has come out with an unlimited buying program of its own. I have always been a skeptic when it comes to QE, be it 1,2 or 3. I simply do not see those programs creating jobs. After all, the job market, along with housing, is the backbone of the economy. Without job creation, this economy is a sitting duck.
There is no denying that the economy is improving, albeit at a snail's pace. Jobs have not turned around as Bernanke and Co. would have hoped, but I believe in time the tide will turn and the economy will gather steam.In the meantime, expect to continue to see hard times in the eurozone, headlines being spat out about how China is slowing too rapidly, and periods of fear-based trade that will come and go for the foreseeable future. Knowing this information, how could one benefit from it? My suggestion is to keep an eye on rising implied volatilities of futures options. After all, when fear rears its ugly head, option premiums often will go through the roof, and can present opportunities to profit by selling what, in my opinion, are overpriced options. The saying "buy low, sell high" is no different here. Instead, however, you are doing it in reverse -- selling high and buying low. For example, should oil get sold off really hard over a period of a few weeks and get back down to the $75-$80 a barrel level, I would look to be a put seller. The reason being that the options at that point have likely become significantly more expensive, but also because I am hard-pressed to see the price of oil going a lot lower than that these days. I would look to sell strikes in the $55-$60 per barrel range. Anything is possible, but I think it's unlikely we will see oil falling to those levels. Gold is another example. The next time we see a large fund or player in the market decide to dump their position, we could see a very large drop in gold. In fact, the idea of gold declining by $70-$100 or more in a session has happened several times before, and I think it will happen again at some point. When those "scary" days occur, I have seen opportunities to sell gold puts several hundred dollars out of the money as put premiums explode while people scramble to buy protection. This is where I believe the astute option seller can potentially take advantage of overpriced options. Lastly, Eurocurrency futures may potentially present some good call-selling opportunities. I think the euro belongs at parity with the dollar, and I think that over time, it will continue to move closer to that level. One can clearly see that the trend on a monthly chart of the euro is down as well, thus putting the odds even more in your favor. While this market may go through periods of "euphoria" and rally several hundred ticks, I believe that the fundamentals in this market will dictate trade and that any potential upside in the euro will be fairly limited. These are just a few of the types of opportunities I will be looking for. Feel free to contact me to see if option writing may have a place in your overall investment strategy. Please note: Futures and options trading is inherently risky and isn't suitable for all investors. Past performance isn't indicative of future results. Stop-loss orders meant to limit losses may not be effective because market conditions may make it impossible to execute such orders.
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