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Options investing: Profit from every market mood swing

Posted January 8, 2008

‘Lately, foretelling signs of a recession have forced the equities market into a perpetual bad mood. But that is okay. As long as we know it is coming, there are plenty of ways to make money. ’ – Andrew Snyder

By Andrew Snyder

Baltimore (TFN) — Love and money, they are the foundation of our modern-day society. Need proof? Flick on your TV set. I bet the first program you come to will focus on one of the topics.

In many ways, love and money are very similar. Many times it takes one to get the other, and both can be here one instant and gone the next.

It is the fickle nature of these subjects that confuse many folks. During my undergrad girls, I dated a girl whose emotions swung wilder than any stock market. Most of the time, I lived in a bewildered haze. Judging her mood was a crapshoot, less predictable than a role of the dice. At first it was confusing and annoying. But after a while, I turned it into a game.

Some days I would bet the farm that she would show up in a good mood. Other days, I would go with the odds and plan for a horrid mood where one wrong word out of my mouth would leave me studying my severed neck, wondering how somebody so small can chew so fast.

The world of money is not much different. Many investors wake up wondering what kind of mood the markets will be in that day. Fortunately the market is much more predictable than my college sweetheart. Although it may sometimes appear the market takes a devilish turn because humidity creates a “bad hair day,” more often than not a downturn occurs because of something real and tangible.

The recession is coming. The recession is coming.

Lately, foretelling signs of a recession have forced the equities market into a perpetual bad mood. But that is okay. As long as we know it is coming, there are plenty of ways to make money.

One of the best ways to make above-average gains is to play the options market. I know what you are thinking as you get ready to click open another article.

“Oooh… no. Options are way to speculative and risky for me.”

You are probably right. Unless you are a well-seasoned investor with lots of room for risk in his portfolio, most options are extremely risky. But I am not writing about most options. I am going to tell you about a very specific group of options that come with all of the profit potential, but only a fraction of the risk.

We have all heard of the Standard and Poors 500 (the S&P 500). It is an index designed to track the most widely held equity positions. Because it measures such a large sampling of companies, it is a fantastic gauge of the overall market.

Thanks to Standard and Poors Depository Receipts (SPDRs or Spiders, which trade under the symbol, SPY:AMEX) a unique security that allows investors to directly play the movement of the highly touted index, you can profit from any market movement, good or bad.

No fear of spiders

SPDRs are very flexible investments. You can play the shares, which represent one-tenth of the index’s value, long or short. Or, best of all, you can purchase options based on the underlying shares. With the market entering recessionary stages, SPDR put options are very appealing.

One of the most popular downside plays right now is the February 136 Puts (SFBNF.X). With any more negative news out of the markets, these options could soar in value before there expiration date more than a month away.

For investors that want to use a more sector-specific investment, there are plenty of options. Select-Sector SPDRs have been created from nearly every industry, from finance to energy to healthcare. If you believe a certain economic sector is going to make greater moves than the rest of the market, these are great option plays.

Right now, smart investors are taking a serious look at the Financial SPDR (XLF:AMEX) and the Energy SPDR (XLE:AMEX). Both industries offer substantial profit opportunity for options investors. Every Select-Sector SPDR offers options plays that with great potential.

It is true, the stock market can be a fickle beast; up one day, down the next. But with smart investing and the proper use of every weapon in your arsenal, substantial profits can be made every time the market makes even the slightest move. In the financial world, mood swings are not always a bad thing. In the world of love and lust however, well, I am certainly no expert on that subject.


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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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