Category Archives: Risk

The Horrible Hole

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I’ve had my fair share of horrible memories in life (hey, that’s a cheerful way to kick off a post, isn’t it?) but one that stands out as one of the worst was September 1, 2010. I’ve mentioned this date before, because it was a searing, horrible experience for me.

At the time, I was very, very aggressively short the market, and I (very naively) thought that, with interest rates at 0, there was nothing left for the Fed to do. Ummm – – wrong! As we all know, the Fed really has no limits as to what it can conjure up, and Bernanke unveiled a massive quantitative easing program. Trillions of dollars later, we all can plainly see that it didn’t work (although the man still gets paid a quarter million bucks to make a single boring speech), but at the time, it was just the tonic the stock market needed. (more…)

A Lower-Risk Way To Bet Against Oil

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Our Highest-Ranked ETF is a Bet Against Oil – And The Global Economy

Each trading day, Portfolio Armor calculates potential returns for every security with options traded on it in the U.S. Potential returns are high-end estimates of how the security might perform over the next six months, and they’re based on an analysis of price history and on option market sentiment. On Friday, the security with the 5th highest potential return in our universe (which consists of all securities with options traded on them in the U.S.) was the ProShares Ultra Short Bloomberg Crude Oil ETF (SCO), which is 2x short oil.

SCO had a potential return of 19%, which was 5th overall, but the highest of any ETF in our system. Here’s a way an investor who wants to bet against oil (and, by extension, much of the global economy) can own SCO while limiting his downside risk to a decline of no more than 15% if SCO moves against him. The best part is, the cost of this hedge is negative, so our investor would essentially be getting paid to hedge.

Getting Paid To Hedge SCO (more…)

Getting Paid To Hedge VXX

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Hey Fellow Slopers,

With the VIX jumping again on today’s market drop, here’s a quick  Portfolio Armor optimal collar hedge that might of interest to some playing VXX: cap your potential upside at 20%, limit your downside risk to a max drawdown of 20%, get paid 6.47% of position value to hedge.


As you can see at the bottom of the screen capture above, the cost of the put leg of this collar was $2,270, or 11.48% of position value. But if you look at the call leg below, you see that the income it generated was greater: $3,550, or 17.95% of position value…


… So the net cost of this optimal collar hedge was -$1,280, or -6.47% of position value, meaning an investor would essentially get paid to open this hedge.*

*To be conservative Portfolio Armor calculated the cost of the puts at the ask, and the income from the calls at the bid; in practice, you can often buy puts for less (at some point between the bid and ask) and sell calls for more (again, at some point between the bid and the ask). So you would probably have collected more than $1,280 to open this hedge.

Option Avoidance=Good For Me

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There are a couple of classes of trading vehicle I swore off years ago: options and FOREX. From time to time, I’m tempted to give options another whirl, but I hold myself back. This happened earlier this summer, so I did a little experiment: I put a marker on a chart of an option I would have bought indicating my “pretend” trade.

Well, after a few days, the option shot higher, pushing up over 50%. I begin to reconsider my self-imposed ban on options trading. But you can see what’s happened since then (and remember, this is a fairly conservative option, not expiring until the end of the year!)

I know options work great for a few of you out there, and that’s just dandy. For me, this little exercise just reassured me that I made the right choice swearing off the things.