The following is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences with anyone who is interested.

Arguably, government interference was the largest single influence on stocks in 2011. The effects of major events, such as the tsunami and nuclear disaster inJapan, were overshadowed by debt crisies worldwide. As European governments struggled to keep the contagion inGreecefrom spreading, theU.S.was fighting its own battles with a debt ceiling that resulted in a lengthy partisan showdown inWashington.

In addition to debt, the end of a second round of Quantitative Easing combined with fears of a double-dip recession fueled speculation that QE3 might be right around the corner; or perhaps has already begun behind the scenes. The stock market began making unprecedented wild swings over the summer as each consecutive news release seemed to paint a picture of either economic bliss or the end of the world. Better economic numbers one day were forgotten the next, as another government toppled under the pressures of the Arab Spring. So, what’s ahead for 2012? It appears that the New Normal will continue.

Just what is the New Normal? It’s a stock market in which trend signals are unreliable. It’s a market in which candlestick patterns often fail to provide clues to the future; Fibonacci retracements are practically useless, resistance and support are consistently ignored. As efficient as the market is, government influence has the ability to outweigh the fundamentals. Even with a strong trading system, without insider knowledge of the plans of governments to manipulate prices, there are likely to be recurring episodes during which stocks are un-tradable. However, the government can not change the behavior of options.

If the wild market of 2011 did not entice traders to explore options, 2012 may do the trick. The reason is that the options market is ultra-efficient. Uncertainties surrounding worldwide events are baked into the premiums of options, months or years in advance. Governments can provide temporary relief to stock traders by artificially propping up prices, but they are nearly powerless in the world of options. Option premiums always represent a fair price at the time of the transaction; there are no artificial discounts. A put seller may get a lower premium when the underlying price is inflated, but ultimately it is implied volatility that determines the premium, not the actions of any government.

Over the next several weeks, I will be posting option strategies designed to cope with the NewNormal. I’d like to thank readers for their comments and questions over the past year, and look forward to continuing the discussion in the New Year.

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