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Event Driven Markets
The Smart Profits Report: Issue #244
Friday, September 23, 2005
Event Driven Markets: The ONE Case for Using Short-Term Options
By Karim Rahemtulla
Chairman, Mt. Vernon Research
It never fails… Whenever I leave town for a seminar or meeting over the summer, a hurricane pops up on the screen. As a Florida resident who suffered through four hurricanes last year, my anxiety level always increases between August and October.
I recently spoke to friends in New Orleans who are just now tabulating the damage left by Katrina, only to be told that they must re-evacuate because of Hurricane Rita. The damage from Katrina devastated not only the poor, but all strata of New Orleans society.
The other certainty regarding hurricane season is massive market volatility. The only time I advocate using short-term options is during event driven markets.
Triple-Digit Option Profits Shorting Allstate
This year we are seeing the energy markets go bananas on a daily basis. The other sector that gyrates is the insurance sector. Last year I wrote about my “hurricane play,” shorting insurance companies like Allstate, using short-term options.
This year, again, I have bought short-term puts on Allstate. And this year, again, I have been able to record triple-digit profits in a very short time.
However, these are returns that I am not looking forward to. I use the puts on the insurance companies, and others that I buy on the major indexes, as hedges against losses that might occur in the rest of my portfolio.
So what might sound like a macabre recommendation at the outset actually becomes a smart way to hedge against personal financial catastrophe.
Don’t Be Paralyzed by Events
Options are important investment vehicles that are often overlooked by paralyzed investors during crisis situations. It is critical that you learn about and use these vehicles, as I do, during times of uncertainty and crisis.
Short-term options are risky investments, to be sure, but one can argue that not having insurance is even more risky.
Good trading,
Karim
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Today’s Smart Profits Cribsheet
- Check out the Smart Profits Glossary for definitions of terms like “put options” or “hedging” found in today’s article.
- For Karim’s article from 2004 about his “hurricane play,” check out Smart Profits #140, Damage Control: The Perfect Option Play for Hurricane Season.
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- How to Use Puts and Calls: For Systematic Short-Term Profits
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- Option Investing: The Hottest Ticket On Wall Street
