A Bearish Option Portfolio That Can Gain Even if the Market Doesn’t Fall

Where should you place your investment dollars in this time of uncertainty?  There are no easy answers. 

The stock market is not an comfortable place to be.  Through the first ten months of 2011 (in what many have considered to be a good year for the market), it has gained about 2%.  It is lower today than it was three years ago.  Bonds do not yield enough to make much of a difference, and CD rates are pathetic.  Foreign stocks have not done appreciably better than domestic stocks.  And real estate has been a great way to lose money big time.

I believe that our SPY portfolios offer greater potential for monetary returns than any investment alternative out there.  (SPY is the tracking stock for the S&P 500 stock index, so you are trading on the entire market rather than an individual stock.)

Today I would like to share with you the risk profile graph of one of our SPY portfolios – this one is called the 10K Bear.  It is positioned to do best if the market falls.  It can serve as a hedge against your other investments which presumably do best if the market moves higher.

I hope you will spend a few minutes studying the graph below.  If you can see what will happen in the next few days (ending Friday, November 11th), you will have a much better understanding of why I believe that options offer more potential than just about any other investment you can make.

I hope you will make a 5-minute investment in yourself and study the graph carefully.

A Bearish Option Portfolio That Can Gain Even if the Market Doesn’t Fall:

 
The 10K Bear is a portfolio currently worth about $4000.  We own puts at several different strike prices (between $124 and $128).  These puts will expire on the third Friday in January of 2012.  Against these long puts we have sold Weekly puts which will expire on November 11, 2011.  These Weekly puts are at lower strike prices (from $121 to $125).

The Weekly puts that we have sold have higher decay rates than the January puts that we own (all options fall in value, or decay, every day the underlying stock remains flat).  This means that every day that the market does not fluctuate, our portfolio value grows larger.   That is the neat thing about a properly-designed options portfolio.  You can make gains even if you are wrong.  When you buy stock, the only way you make money is if the stock moves higher.  With options, you can make substantial gains even if the market stays absolutely flat (or moves moderately either up or down).

Here is the risk profile graph for our 10K Bear portfolio.  It shows how much the portfolio will gain or lose at the possible ending stock prices this Friday.

The second column from the right (under P/L Day) gives the dollar loss or gain at the three selected prices in the first column (Stk Price), and you can estimate the losses or gains from the graph curve at other possible stock prices.  At last Friday’s close, SPY was trading at $125.75.

You can see that if the stock is absolutely the same at the close next Friday, the portfolio will gain $901, or about 22% on the $4000 portfolio value.  If the stock falls moderately, by $2, and ends up at $123.75, the gain should be $1,337, or about 33%.  (Both these numbers will be reduced slightly from commissions and trading costs when the Weeklys are bought back next Friday and replaced with Weeklys that expire on November 18th.)

The stock can go up as high as $129 before a loss should result.  In other words, the portfolio makes excellent money if the stock stays flat, even more money if the market falls moderately, and it also can gain if the market goes up (as long as the rise is not too great).

Where else can you invest your money and expect these kinds of returns?  If you know of anything that can offer even remotely as great as these gains, please send the details along to me.  If you like, I would share them with my subscribers so we all could benefit.

Last week, the market was weak.  SPY fell $3.12.  Our 10K Bear portfolio gained 24% (after commissions and roll-over costs).  That is more than most stock investments make in several years.  We did it in a single week.

Why are you waiting any longer before you learn the details of how you can start making money using the 10K Strategy that is the basis of the 8 actual portfolios that we carry out (and you can easily duplicate in your own account, either on your own or through the Auto-Trade program at thinkorswim)?

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