By Chris Ebert

It’s easy to panic when someone as visible as Alan Greenspan, former chair of the U.S. Federal Reserve, mentions the possibility of a “significant correction” coming for the stock market.

It may be helpful for traders to consider just what a “significant correction” would entail, thus making it recognizable if it does occur. Healthy risk-management often involves hoping for the best and preparing for the worst, so it is important to readily identify the worst, should it indeed occur. Traders who are prepares for the worst are less likely to panic, and thus have an edge in the market.

Options Market Stages 2014-07-30

Click on chart to enlarge

 

*Option position returns are extrapolated from historical data deemed reliable, but which cannot be guaranteed accurate. Not all strike prices and expiration dates may be available for trading, so actual returns may differ slightly from those calculated above.

The preceding is a post by Christopher Ebert, co-author of the popular option trading book “Show Me Your Options!” He uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to OptionScientist@zentrader.ca

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