In a Volatile Market
I’m going to be very brief today, because I want you to set aside the time to watch Wall Street Daily Chief Options Analyst Lee Lowell go deep on a trading strategy that will put money in your brokerage account instantly.
Lee’s presentation today is more detailed than what we usually offer in the Saturday Spotlight.
But it’s well worth your time.
In fact, the strategy – which Lee detailed in a January 18, 2016, Memorandum for members of Wall Street Daily’s Presidents Club – is perfectly tailored for today’s volatile trading environment.
Rule No. 1
When it comes to investing, the first, most important rule is to preserve capital. It follows from that solid proposition that we should limit downside exposure.
As hard as it is to endure, volatility is part of the reality of being an investor – the ups, the downs, the sideways action.
The Chicago Board Options Exchange Volatility Index (VIX) – a measure of “implied” volatility based on options premiums often called the market’s “fear gauge” – spiked in early 2016, as we suffered through the worst-ever start to a trading year.
The VIX has been bouncy again this week.
“Actual” volatility is also up, with the 20-day historical volatility of the S&P 500 Index ticking above 20% for the first time since October 2015.
With equities trending lower, amid large (up and down) moves from one day to the next, it’s difficult to take a dispassionate view of volatility.
At the same time, such a view is key to risk management.
And it’s even more important when it comes to identifying opportunities in such a climate.
Small Upfront, Big Upside
As Lee noted in his January 18 Presidents Club Memorandum, “The best part about buying options contracts is that you only have to pay a very small amount of money in order to participate in a stock’s movement.”
Indeed, buying deep-in-the-money call options allows you to benefit from a stock’s movement – but you’ll pay anywhere from 50% to 80% less than it would cost you to buy the shares.
So you’ve reduced your risk by 50% to 80%.
And you’ve gone a long way toward preserving your capital.
The key metric when it comes to deep-in-the-money call options is “delta.”
“Delta tells us how much the option price will move with any corresponding move in the price of the stock,” Lee writes. Deltas range from 0% to 100%. The higher the delta, the more the option price will move in lockstep with the stock price.
Here’s the rule of thumb: “We want that relationship (or delta) to be at least 90% or greater.”
If it sounds too good to be true, it is.
That’s the age-old conclusion Global Markets Analyst Martin Hutchinson reminds us of in his overview of a $7.6 billion scheme uncovered in China that ensnared 900,000 investors.
At the same time, “With interest rates jammed against zero,” notes Martin, “the Ponzified proportion of the world economy will be increasing all the time.”
Martin also chimes in with word on an incredibly shifting tax burden.
Martin provides details from the U.S. and abroad that demonstrate that “loopholes and scams, both domestic and international, have proliferated – and now the system doesn’t work.”
Donning his “politics” hat, Martin takes stock of financial information mogul Michael Bloomberg and his prospects as a late-entering 2016 presidential candidate.
Is Bloomberg the one to break the rising populist tide – right and left – and ensure responsible custodianship of the White House for the next four years?
Senior Correspondent Shelley Goldberg takes a look at the impact of the commodities crash, with a special emphasis on credit markets.
As Shelley notes, “According to Group Credit Officer Mariarosa Verde, the commodity crisis is occurring during a more mature credit cycle. That means growing stress among commodities poses a great danger to the cycle itself.”
Deterioration has accelerated, and slowing global growth and weakening demand from China suggest the supply-demand imbalance in the oil market will persist – with dire consequences.
Finally, Senior Analyst Greg Miller examines the potential for the Internet of Things (IoT) to combine with Big Data to drive improved delivery of healthcare services.
“This combination of Big Data and the IoT harnesses the power of two huge technologies – devices that collect data and the massive computing power to process and analyze all that data in order to put it to use,” Greg writes.