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I'm betting this US "market meltup" has a way to run, before it eventually implodes. (and the cdn. market will
toddle along behind)., What's the best way to play it on its run-up, on the US, and Cdn. sides? ETFs? Individual stocks? Which ones? Suggestions?
 

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For a short term play you get more bang for your buck with options. If you don't have a particular stock in mind buy one of the indexes like the S&P, Dow or NASDAQ. They all have representative ETFs and options.

Best buy is a call option with around 70 delta.3 to 6 months out. You can buy a Feb 16 18 247 call option in the SPY with 116 days to run, for $1315. It has about $1000 intrinsic value, the rest is time value.

If the S&P runs up to 2770 by February it will be worth $3000. On the other hand if it drops below 2470 the option will expire worthless. So, it is like a lottery ticket. Best to roll or sell about a month before expiry.

There are other possibilities in other ETFs and time periods, that is just an example.
 

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Jargey I bought lotto ticket 1 SPX Dec 2018 3500 call for .80

Call will probably expire worthless though if get melt up payout will be good.

Options are cheap right now if get melt up or crash positioned for. Holding OTM puts as well. No melt up or crash options will most likely be worthless.
 

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The best way to play it, I think, is via indexing. On the way down, not sure. Things will change/correct/implode eventually. Just don't know when. Whatta bull run.
 

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What a great 2017 bubble thread! I remember discussions like this before in 2006 and 2007 back at Yahoo forums. I wouldn't pick individual stocks, since even the institutions these days play these themes using broader vehicles. Here are some ideas, NONE of which I'm doing. Personally I think some of these are only good ideas if they fit within your geographically diversified asset allocation and only in small doses.

  • ASHR: join the China rally. 22% one year return.
  • EEM: join the emerging markets rally, overlaps with China. 25% one year return.
  • SSO: leveraged S&P 500 index, not a bad vehicle actually. 47% one year return.
  • XIV/SVXY: bet on declining volatility. 186% one year return.
I think all of these will benefit from a market melt-up. Personally I think the S&P 500 index is ground zero for the equity mania, so if I wanted to play a melt-up, I'd probably use SSO or XIV (which are 1st and 2nd order derivatives of the S&P 500). The 5 year annualized return of SSO is 28%, and for XIV it's 46%. Annually!

WARNING: my guess is that those derivatives will crash 70% to 95% once volatility returns and the US market falls.

So if you want to get crazy, you can definitely go this route. For the record, I have 25% exposure to stocks and far more money in cash & fixed income.
 

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Why is a delta of 70 the "best buy", in your opinion?
Bang for the buck. It has $1000 worth of intrinsic value and $315 of time value. And 70 delta means it moves about 70% as much as the underlying. If the underlying moves up or down, the intrinsic value changes dollar for dollar but the time value doesn't. If the SPY drops you will lose less than if you owned the SPY. You will also gain less but only paid a small fraction as much for the privilege.

Far OTM options like Lonewolf buys are a pure sucker bet. There is not one chance in a hundred they will pay off. Actual probability of expiring worthless, 99.93%. Probability of mine expiring worthless, 34.76%.

So why buy them? Because for $12.50 a share (they went down) you can "own" a $256 security and get nearly the same dollars of profit as if you owned it outright. That is what I mean by bang for the buck.

It also means your max loss is $12.50 a share, same as if SPY dropped to $243.50 but no more than that.

Out of the money options are cheaper but have less chance of going in the money.

To put it another way. The best option would be the at the money option. Stock goes up, boom you make money. The problem is, this is the most expensive option in terms of time premium. By buying an ITM option you get a larger percentage return. You can also buy OTM options but they are much less likely to pay off.

I like buying option spreads. They are cheaper to buy and reduce risk of loss but also cap your gains. Unless you know about rolling but that is getting into more strategy.

I should emphasize once again THESE ARE LOTTERY TICKETS. Not a conservative investment. Personally I think it is crazy to start betting on a rally that has been going on for a year and just set a record as the longest without a 3% drop. If anything we are due for a drop more than a further run up. But if you insist, buying an option is a cheap way to bet.
 

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Further to the above. Any option is a compromise between low price and chance of ending up in the money. If you buy very cheap options the chance of making anything at all, is small. The more expensive the option the more chance you have. The 70 delta rule is a popular rule of thumb among option pros. They consider it a good compromise between cost and value. That is all. You could just as easily take a flyer on an out of the money option if you think there is a small chance the thing will take off like a rocket.
 

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Gotcha. That's what I thought, just a rule of thumb. Personally I'd rather buy a more expensive, deeper call that is much safer, or risk much less than $1300 on an OTM gamble. A $243 could become worthless with just a mild 4% drop over a bad week.
So is the inverse rule of thumb that options sellers generally want to avoid selling ~70 delta options?
 

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Maybe wait until they raise interest rates a few more x to to get more reasonable US valuations. There may be another raise in the US in 2017 and if not definitely in 2018 which should cool growth and valuations to more normal levels. The federal funds rate is still only 1.25%. The rate forecasts are 2.5% for 2018. If they hiked interest rates 1.25 % tomorrow markets would correct ~ 10 % from that alone.

For now low vol more fairly valued EAFE ETFs and some assets that benefit from interest rate hikes.
 

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Gotcha. That's what I thought, just a rule of thumb. Personally I'd rather buy a more expensive, deeper call that is much safer, or risk much less than $1300 on an OTM gamble. A $243 could become worthless with just a mild 4% drop over a bad week.
So is the inverse rule of thumb that options sellers generally want to avoid selling ~70 delta options?
Professional option sellers couldn't care less. They will sell you anything you want, provided they get more for it than it is worth. This is the bid/ask spread. They will buy or sell puts, or calls, ITM or OTM all day long. At the end of the day they will figure out their position and if it is too heavy to the long side, hedge by buying stock or SPX options, or vice versa. Their object is to collect more premium than they pay out and hedge any risk. I am talking about market makers with millions or billions to invest.

I sell calls against my stock positions for the extra profit. I prefer to sell out of the money calls with 85% chance of expiring worthless. This allows me to make a little money with minimal risk of losing my position. If the option gets hit I will roll it out in time and to a higher strike.
 

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Gotcha. That's what I thought, just a rule of thumb. Personally I'd rather buy a more expensive, deeper call that is much safer, or risk much less than $1300 on an OTM gamble. A $243 could become worthless with just a mild 4% drop over a bad week.
So is the inverse rule of thumb that options sellers generally want to avoid selling ~70 delta options?
The $1314 gamble I talked of is an in the money option. When I wrote, the 247 call had $10 of intrinsic value and $3.14 of time value. A drop of $10 in the SPY or $100 in the SPX could wipe out the intrinsic value but it would still have some time value.
 

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Yes I followed you. Sorry I meant I'd rather risk much less than $1300 on a OTM gamble call instead, or a deeper ITM call that was more expensive and safer.

I think, anyways.
 

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Premium is inexpensive now. When premium is inexpensive going into the money & paying intrinsic value to reduce premium cost is less important.

In March of 09 was buying deep in the money calls to reduce premium costs, as options were expensive


Playing possible large moves up or down if market goes against me in large way & sitting with options with a lot of intrinsic value there is a high risk to losing intrinsic value.

The market moves down faster then up & if looking to play possible crash will play long OTM puts

The market moves up slower then it does down to play upside will play long ITM calls for stock indexs

The 1 far OTM call on SPX was a play on a possible phase transition such as DJI made into 1929 top, Nikii Dec 1989 top & gold into the 1981 top. A phase transition does not happen very often & the odds of buying OTM calls to catch one the odds are against which is why payout will be high.
 
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