Yesterday, I heard the argument on CNBC for what I've been thinking all along.
Hedge funds are now almost a bigger part of the market than any other group. If you understand how hedge funds work, you'll also understand that right about now they are most desperate to show returns. They get paid on performance, not fees.
Why has the Russel 2000 constantly been gunning higher? Most likely desperate hedgies that can easily push around small floating stocks to artificially inflate their portfolios which keeps investors (rich people) from bailing.
This is a reason why the SEC is on a vendetta to regulate them. Right now they operate with mear impunity. That's gonna change and that's also possibly going to be a reason for what's been called a 'hedge fund bubble' bursting soon. That could have dramatic consequences for the market because so many of them are leveraged 10 to 1 in their derivitive trading which is then multiplied by 100 to 1.
The good thing about this if it were to happen is that it will return the overall market to some kind of normal trading pattern rather than this constant push/pull action we get.
Remember - 'the market can remain irrational longer than you can remain solvent'.
Live by those words.
So, because I'm not sure about the market right now, I'm going into an AAPL 'hedge wrapper', or collar trade.
Buy 1000 shares of AAPL at about $70. (you buy in multiples of 100 shares = whatever you can afford)
Short 10 April 72.50 calls against it @ $1.85 (no margin required because it's secured by the long stock)
Then, buy 10 April $70 puts against the whole trade at $2.85.
This way you're protected all the way around no matter what AAPL does.
What if:
AAPL closes April's option period (20th) at say, $65?
I lose $5000 on the stock
I make $2150 on the PUT
I make $1850 on the worthless call
Net - I make a profit of $4000 on between the two options. I lose $5000 on the stock on paper for a paper loss of $1000. But my new cost basis is $66, rather than $70 because of the $4 profit.
AAPL closes at $75 on op ex?
The calls get exercised and my stock is called away at $72.50 for a $2500 profit on the stock PLUS I keep the $1850 for the premium I recieved for a total profit of $4350.
I lose $2850 from the put being worthless
NET - I make a net profit of $1500
In both cases, I sleep at night not worrying about what the market's going to do because I'm covered. And, I make about 2% in about 2 weeks if AAPL closes above $72.50 or I lower my basis and keep the stock to do all over again if it closes below $70.
And, there's no margin required for this.
