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We have an expression on the trading floor about how newsletter writers
forecast the market. To be successful always forecast a view of long -
term bullish....but with A HIGH PROBABILITY OF A 5 - 25% CORRECTION at
anytime. Next time you see a popular newsletter examine it for this
scenario.
There are a number of choices...utilizing options in this or any other
market where the assumption is a big move is possible...BUT I DON'T WANT
TO BLEED TO DEATH WAITING FOR IT TO HAPPEN. A SHORT POSITION WITH TIGHT
STOPS HAS STILL BLED YOU TO DEATH OVER THE LAST FEW YEARS....so how
about alternatives;
Sell the posiition..........a good idea except if you've been long you
owe a bunch of tax.
Buy a put as insurance......again a good idea....affords some tax
benefits....but generally to pricey when you want to do it.
Collar the position.....widely used but nobody really want s to sell
that call. They do it to pay for a put they view as too expensive.
Looks good on paper...has been deadly the last few years.
Go to cash and buy calls....same problems relating to taxes{which is why
it is more commonly done by ERISA accounts...it is also hard for some
people to understand the CASH has RISK}
Hold long buy put back spread.......Sell an ATM put against your
position/portfolio...use the proceeds to buy to OTM puts. If the market
rallies you are long and the backspread didn't cost you much. Market
unchanged....again backspread does hurt you any.......Market down a
little....you lose a little..generally not a whole not worse than if you
bought the put outright and still no drag if the market goes up. Market
tanks.....do the math.
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