Portfolio Management: Part II—Managing Direction Changes

Topics:
Commercial Lending
Tags:
Optionetics,
Portfolio Management,
Trend
Source:
Optionetics

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Overview: Portfolios can be “managed” from many different directions. This article explores another method of managing the portfolio, to protect us from market direction changes. The market generally moves in waves or trends, and the selection of strategies reflects the general trend of the market. The article asserts that if one believes the market is in an uptrend, he will utilize bullish strategies such as Bull Call Spreads, Bull Put Spreads, Call Ratio Backspreads, etc. It is obviously easier to find stocks that will follow the trend than it is to look for contrary trades (all the hype on the TV and in the papers is focused on following the trend), but contrarian-direction stocks can be found. By setting aside a portion of the portfolio to trade against the trend, one will actually have that portion going “with the trend” if the trend changes direction and one will be honing the skills for both trends – up and down. By trading both bullishly and bearishly in the same month, people will be performing a type of Portfolio Management. A person can be correct on both types of trades, with the contrarian trade being a big winner if the market changes against anybody, offsetting any losses on the trades that were working in the direction of the former trend. Hopefully the selection of trades will be winners on both sides of the trend, but if a trend-change catches you unawares, this can be a very useful management tool.

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Format: HTML | Date: Dec 2003 | Pages: 1

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