August 2004
Refresh my memory. Wasn't it about a year ago -- or maybe a little longer -- when deflation was a concern? Well, that concern has now shifted in the other direction, with everyone worried about inflation. Now that the Federal Reserve Bank is talking about tightening monetary policy to control inflation, which is rising faster than expected, the topic of interest rates has taken center stage. The concern about inflationary pressures has been partly due to the rise in oil prices, although because of the low interest-rate environment, the global growth rate has also played a major role.
Until the Federal Open Market Committee makes its decision regarding interest rates, this subject will occupy the minds of securities traders. Until then, there won't be much liquidity or movement in the market. After the Fed makes its decision, however, there should be some movement, at least until another concern comes up -- geopolitical risks, the upcoming US elections, almost anything. When there's so much uncertainty, volatility and risk are important variables to keep an eye on. And in such a market, options are an excellent tool to use to protect yourself against market movements.
Trading options comes with many benefits. Besides preserving your capital, options can also be profit-making vehicles. There are more variables to consider when trading options, as well as more strategies, which can make understanding the options market something of a challenge. Fortunately, these days there are several software products available to assist you in analyzing all the various strategies. All you really have to do is plug in a few numbers and analyze the different strategies until you find one that meets your personal risk/reward level.
For the STOCKS & COMMODITIES interview this month, I spoke with George Fontanills of Optionetics.com, who discusses the various strategies and variables you must consider when trading options. According to him, it's worth all the effort, because options are a superior tool when it comes to wealth preservation. On the other hand, it's easy to get wrapped up in the complexities of technical analysis and forget that simpler methods do exist. The feature article this month, Leigh Stevens' "Spotting Index Tops And Bottoms," starting on page 22, demonstrates one such method you may find useful.
Whether or not the market is showing strong movement, preservation of
capital should always be a priority, and trading options can certainly
help you achieve that goal.
Jayanthi Gopalakrishnan,
Editor
Originally published in the August 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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