Long Strip - A Great Bear Market Strategy [Part 1]
Monday, March 9, 2009 at 09:40AM | Asher Pinto Over the weekend, we'd mentioned that we were going to provide a series of short educational articles this week, covering the Long Strip options strategy.
We'll start off the series with an illustration.
The Russell-2000 iShares (IWM) are trading at 35.00 at the moment. The fact that the ETF is sitting nearly precisely at a widely traded strike (as well as the fact that IWM options are amongst the most liquid options overall) means that this would not be a bad point at which to consider a strategy such as a Strip.
The technicals are as important of course and since this is not an educational piece on technical analysis per se, let's just say that the technicals basically point to the probability of a continuing bearish environment on the ETF for the next few sessions, but with the potential for a huge dead cat bounce, at any point. As we'll see later in the series, the Long Strip strategy would do well given either a continued drop or an abrupt bullish reversal.
Another update to ... The Secret to the Markets...
The following is a quick update to the S&P-500 chart featured in the Nov 14th blog article "The Secret to the Stock Market for the Rest of '08", as of the close of the Nov 19th trading session.
The first thing you need to notice is the fact that support at 845 has been demolished as of Wednesday's close. The bulls better be on their knees praying that this was a false break because if they are unable to pull the index back above 845 immediately (as in on Thursday), this index is headed towards the 650-700 area in a hurry.
Now, that reading is based on the descending triangle pattern, of course. The crux of our showing you the chart that has been presented above is the trend in the Bollinger Bands, of course. In the Nov 14th article, we'd laid out a number of reasons why the movement in the Bollinger Bands was to be seen as being more important than perhaps even price action itself.
Well, the lower Bollinger Band started falling several days ago and, as such, predicted that support would be broken sooner rather than later. If you'd studied the Bollinger Bands, you would have know that there was a high probability that it was only a matter of time before support at 845 would be taken out.
Our Short Stock Picks list and Volatility Options Picks lists have been chock full of bearish trading picks for the past several sessions - even well before the actual breaking of support at 845 - and there have been virtually NO bullish picks on any of the lists whatsoever. Why? It is simple. The Bollinger Bands were providing us with a very good indication that all hell was about to break loose to the downside. Buying stocks made no sense whatsoever; shorting stocks (or taking on volatility-based options positions) did!
This foresight has been especially useful and, as a result, our lists are filled to the brim with profitable trading picks (as they have been for the past several months, may we add...).
Technical Analysis is a great art and science but it is NOT one-dimensional.
Too many chartists use price action (patterns and formations) alone to guide them in their analysis. We do not relegate ourselves to the mundane chart patterns alone. Instead we follow a more holistic approach utilizing Chart Patterns, Volume Analysis, Fibonacci Analysis, Bollinger Band Theory, Momentum Indicators and Sentiment Analysis (strictly via studies of the VIX and P/C Ratios).
None of these methods is our creation. The great technicians before us have given us the gift of these great technical analysis tools and all we have done, through years and years of painstaking study, is learn how to use these tools to our benefit.
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