Sink or Swim Reloaded

by | 11.09.2022 | Lime Newsletters

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.


Information on Disclosure Agreements
© 2022 Securities are offered by Lime Trading Corp., member FINRA & SIPCNFA, Lime Advisory Corp is an investment adviser registered with the SEC. and Lime FinTech is a technology business. Collectively known as “Lime Financial” or “Lime” provide various trading, investment advisory services, and technology solutions including web and mobile trading applications, to retail and institutional investors. All investing incurs risk, including but not limited to loss of principal. Further information may be found on our Disclosures Page.

Please read the Options Disclosure Document titled “Characteristics and Risks of Standardized Options” before trading options.

Options trading entails significant risk and is not appropriate for all investors. Certain options strategies carry additional risk and investors may lose 100% of funds invested in a short period of time. Investors should consult with a tax advisor as to how taxes may affect the outcome of any options strategy. Options trading privileges are subject to Lime Trading Corp. review and approval. Transaction costs may be significant in multi-leg option strategies, including spreads and straddles, as they involve multiple commission charges.

This material has been prepared for informational purposes only and is NOT intended to provide nor should it be relied on for tax, legal, or accounting advice. Please consult your own tax, legal, and accounting advisors before engaging in any securities transactions as each individual investment(s) may result in diverse/adverse tax implications that will affect the outcome of any investment strategy. No information presented herein should be considered an offer to buy or sell a particular type of security. This is not an offer or solicitation in any jurisdiction where we are not advertised to do business. Other fees, such as regulatory, service, or other fees, may apply. Please visit our Pricing Page for further information. Investments involve risk, past performance does not represent future results. Diversification may help spread risk but does not protect in a down market. You may lose all of your investment. Investors should evaluate their financial situation, investment objectives, and goals before investing. Substantial risks are involved with electronic trading. Day trading involves significant risk and is not suitable for all investors. Please see our Day Trading Risk Disclosure Statement for more detailed information. Trading on margin is not appropriate for every investor. Please see our Margin Disclosure Statement for information on risks. System response may vary due to multiple factors including but not limited to trading volumes, market conditions, system performance, and other factors. Access to electronic services may be limited or unavailable during periods of peak demand, market volatility, systems upgrades, maintenance, or for other reasons.

Exchange Traded Funds (ETFs) are subject to market risk, including the loss of principal. The value of any ETF and thus the portfolio that holds an ETF will fluctuate with the value of the underlying securities in the ETF reference basket. ETFs trade with the same brokerage commissions associated with buying and selling equities unless trading occurs in a fee-based account. ETFs often trade for less than their net asset value. Refer to Disclosure Statements | Lime Financial.

Backtesting, simulation, and production trading

Featured Video

Is Your Broker Reliable?

Is Your Broker Reliable?

If you’ve dealt with unreliable trading technology in the past year, you’re not alone. Both slow reporting and complete outages happened to several trading firms during high volatility days in 2021.

read more
What is Rule 15c3-5?

What is Rule 15c3-5?

Before an order is eligible to be sent for execution, it must pass through a broker’s pre-trade risk check to ensure the order is not violating any pre-determined thresholds. This rule is known as Rule 15c3-5, but what is this rule exactly? Bob Iaccino explores.

read more

Sign Up For Our Newsletter