FED cuts rate - Freaking out ?
The FED just cut the rate by half a point (amazing that we are still above Zero) and the market is freaking out. Everybody wanted a rate cut, then they got it, then the DOW jumped and then it fell on it knees. What does TheStrangle make of all of this?
It is juts crazy times. Looks like we are close to zero interest rates as the market demands another quarter point cut and Donald Trump is pushing them in same direction. But what's left if we hit 0% interest rate? 0% interest rates (read the great article by Caroline Baum on MarketWatch "If the economy is in ‘a good place,’ then why are interest rates so low?"
We would not be surprised to see one of these things coming
Negative interest rates !
Helicopter Money - giving away free money to buy stocks and gods.
The FED buying stocks
Does all of this make sense? Is the only purpose of the FED to make sure that stock market never plunges again (the "Plunge Protection team" could give a hint - what a name). Is there no free market anymore? We have no clue but we have seen amazing stuff during the last crisis from 2007 until 2009 and from there on. Who knows what is best? We don't.
Crazy times. DOW down 1.000 points - DOW up 1.000 points. Coronavirus around the corner. Leverage everywhere sky high (just ask Deutsche Bank and their derivatives managers). Housing prices up like crazy. Average Joe under water with debt for credit cards, student loans, car finances, mortgages - you name it.
If we would hold stocks now, we could not sleep and would be sitting here nail biting. If we would have bought stocks on margin we would be sitting on the window sill.
But we are NOT freaking out !
In times like these you see the advantage of TheStrangle approach. We do not know the stock markets next move. It can go up like crazy or it can fall like a knife. We sleep like a baby because with a strangle we have both sides covered. We have Calls and Puts and we always invest the same amount on both sides. If the basis instrument craters, we sell our Puts (hopefully with a profit) and keep the Calls just in case the underlying stock recovers. And if the stock moons we do the opposite.
Does this mean we always make profit? NO. We very often lose the whole investment because the stock does not move enough within the given time frame. Never forget that an option expires sometimes and it might do so worthless. But even then, we only lose around 2.000 $ as we never invest more. All our strangles are similar. We invest around 1K on the Call-side and 1K $ on the Put-Side.
So far we have done very well with this approach. From August 2019 until now we achieved a profit of 26.000 $ (see results here). And our current portfolio does not look to bad either - we are deep in the black (look here).
The only problem we currently have is that the premiums on options are sky high. We would love to buy more stuff now as we assume the market will either crash or go boom and then bust. But everything is very expensive now. But yesterday we found one candidate - Bank of America. If the plunge can be avoided they might benefit a lot and if the market crashes they might crash with the market. Remember, they traded for 3 $ during the last crisis.
As often said - we have no clue. Or as the great Peter Leeds says "I am wrong 100% percent of the time" (check out his great videos on YouTube here). That's why we use TheStrangle approach where we invest in both sides of the story.
In that sense - Strangle ahead !
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