Sink or Swim Reloaded
What If We Expect a Robust Rally or Deep Sell-Off?
At the start of the summer in Issue 1, Make or Break Summer for Stocks (July 20), we presented a “bifurcated outlook” strategy, which is based on investors’ expectations of either a strong rebound, (swim), or further sell-off, (sink), following a dreadful first half of 2022.
Initially, stocks attempted to swim but the rally faltered, and stocks sunk. Between July 20 and September 30, the SP500 fell 9.5%. As a result, the strategy worked well as the underlying index fell more than the 5% threshold required to accrue a profit.
To investors who remain in a “bifurcated outlook” mindset (i.e., expecting a big move but in an uncertain direction), this strategy remains a viable way to position their investments.
Reloading Sink or Swim
The strategy (i.e., technically, a “short condor”) can be deployed with any underlying security with an active options market, such as the index-tracking ETFs SPY (S&P500), QQQ (Nasdaq), and IWM (Russell 2000).
This position is relatively aggressive. It provides a profit if the underlying security gains or loses 5%+ but could lead to a 100% loss if the market trades sideways.
Depending on the equity market performance, as reflected in the indexes tracked by each ETF, each position would have a maximum value of $2,000 at expiration if the move is above approximately 10%, $0 if the move is between +5% and -5%, and at pro-rata for intermediate performances.
What could go wrong with this type of strategy?
This strategy is aggressive. It requires a significant move in the equity market to produce a profit and could lead to a 100% loss if the security (in the example, the index-tracking ETF’s SPY, QQQ, or IWM) fails to move more than 5% between now and year-end.
Gabriel Salas is a Senior Advisor to Lime Fintech, LLC and is not a representative of Lime Trading Corp. Articles written by Mr. Salas are provided by Lime Fintech, LLC, a separate but affiliated third-party. Lime Trading Corp. does not endorse or recommend products or services provided by third parties, makes no representation, and assumes no liability for the accuracy or completeness of third-party products or services.
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