The Freedom Factory

Funny things have been going on in markets for some time now. Stocks, corporate bonds, commodities, and currencies were decimated in 2008, with the volatility threatening to persist into the New Year. There’s talk of deflation, inflation, stagflation, defaults, bankruptcies, layoffs, unemployment, and the best word of the year: de-leveraging. Wait, is that even a word?

The only thing we know is that we don’t really know what’s happening or where it’ll take us. The more confused people become the more gold they buy. In fact, from peak to trough gold (GLD) has risen 52% over the last 52 weeks. With this kind of bull run, it makes sense to lodge a small bet in the other direction. Continue Reading

Government policy drives markets. With trillions of dollars being spent by Congress and doled out by the Federal Reserve in one bailout plan after another, we all need to think about how these programs will affect our financial positions.

Will we experience hyperinflation, the kind that can wipe out our life savings? Or will these targeted bailouts stimulate tremendous growth in certain industries?

In one of my favorite movies, Rounders, Matt Damon relates that in poker “if you can’t spot the sucker in the first half hour at the table…you are the sucker.” Read my book, Obamanomics: How To Invest Over the Next Administration to make sure government policies don’t make you the sucker!

Spread strategies are the cornerstone of writing options for income. The following wikipedia link offers a nice overview. The spreads I advocate and actively trade are vertical spreads that involve simultaneously buying and selling contracts with varying strike prices on the same underlying security, with the same time to expiration. Furthermore, I strongly advocate constructing net credit positions in which you exploit the time decaying nature of option prices. There are three strategies that fall into this category:

Bear Call Spread

Bear call spreads involve constructing a call spread that makes money if the underlying asset does not settle above a set strike price at expiration. For instance, I currently have a Sep07 520/530 call spread on GOOG. I sold 520′s and bought 530′s, netting a credit to my account since the 520′s are more valuable than the 530′s. I have a 100% win if GOOG settles below 520 on the 21st of the month, so keep your fingers crossed!

Bull Put Spread

Bull put spreads are constructed by simulatanously selling and buying puts with varying strikes on the same underlying security with the same time to expiration. The position earns maximum profit when the asset’s price settles above the strike of the put you sold. A current example in my portoflio is a Sep07 470/480 bull put spread on GOOG, in which I sold 480′s and bought 470′s.

Condor Spread

The condor spread is my personal favorite. This position is constructed by simultanously implementing the previous two strategies. The 520/530 call and 470/480 put spreads on GOOG are two legs of a condor. The above profit-loss diagram shows that maximum profit occurs if GOOG settles between 480 and 520 on the 21st of September.

The margin requirement for a spread is the difference between strikes (the spread) minus the credit received. In each condor leg there is a spread of 10, which is multipled by 100 shares per contract, for a total margin requirement of $1,000 minus the credit received. This adjusted figure is the amount of collateral my broker requires I keep in cash to cover my trades.

The most you can lose in any of these trades is the margin requirment.

The great thing about condor’s is that credit from both legs is subtracted from the same per-leg margin requirement, which can significantly lower the figure. Rather than adding each $1,000 leg, the total requirement for both legs is that amount. This is because the legs are perfectly negatively correlated and the underlying security can only assume one value at expiration (It cannot be both below 480 and above 520!) This is a great way to maximize ROIC and bound risk.

Getting Started With Iron Condors.: With real estate prices still falling, stocks whipping around like crazy, and even U.S. Treasury bonds becoming increasingly risky, it pays to investigate alternative forms of investing. One method I use regularly is selling market insurance.

Every investment involves risk and everyone has their own objectives. Some people want low risk and are OK with low returns. Iron Condor trading strategies turn these people into your clients.

Learn how to use options to start your own insurance business, having the market pay you to insure its risks. Get paid regular premiums every month! This Iron Condor trading system will teach you how to become your own insurance company, managing the market risks you assume. Don’t go into this blindly! Learn how the experts use options to generate steady income.

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