A Lower-Risk Way To Profit from the Credit Unwind

For reasons I will make clear in later posts, I rarely make short side bets, and disciplined investing requires that one not chase after good ideas that have become overpriced and are late in their cycle. That said, for those of us that believe the ramifications of the Credit Unwind /Reset have a long way to run and that the recent enthusiasm for Financial stocks is premature (especially after last week’s rally), I suggest the following as a reasonably way to play this. I should also point out that one of several reasons for recent self-loathing on my part has been due to having substantially missed the opportunities presented by the early stages of the unwind, so this presents a nice consolation prize and one of those rare opportunities to go back in time and reap the reward of knowing what will happen.

The approach??? Write out of the money puts against SKF.

To explain, SKF is the ultra-short Financial ETF and (as to be explained in future posts) one of, if not the only, truly beneficial feature of an ETF for informed investors is the ability to trade options related to it. In the case of SKF, what this provides is the ability to sell an option to purchase a bet against the major financial stocks only at a price considerably more advantageous than is available today and to earn a significant premium in the meantime. (This strategy assumes a good knowledge of the basics of Put Writing.) and I raise it since the bearish premium on SKF has consistently implied that numerous people are betting that the financials will rally dramatically. If you believe, as I do and has been well documented elsewhere (for example globaleconomicanalysis.blogspot.com ) that the ongoing financial unwind is nowhere near a “bottom” then selling well-out-of-the money puts on SKF gives a reasonably safe and advantageous way to pick up a nice payment whenever the pre-mature rallies in the financials happen.