Have a Senior Moment

I remain confident that Santa and his rally are on their way -- having said that, I still have one foot out the door. Implied volatility has come in sharply this month, meaning that call option prices have become much less expensive (mathematically), so I prefer long calls and short far out-of-the-money puts for the bulk of my upside exposure. As an example, on yesterday's close, a February 117 put on the SPDR S&P 500 ETF Trust (SPY) could be sold for $2.11 and a January 124 call could be purchased for $2.85. This was with the SPY trading at $124.17. One way to look at this structure is that you are willing to own the SPY at $117.74 (117 strike plus the difference in option premium since it was a debit combo). If the market rallies from here, however, upside participation begins at a rate of nearly 80% (the addition of the two option series' delta) and will swiftly move near 100% once the SPY appreciates about 4%.

One other intriguing investment product I recently discovered in ETF form is the PowerShares Senior Loan Portfolio (BKLN). I've been working closely with an alternative investment placement firm in determining the best products to offer clients in 2012, and senior loans -- namely, bank loans issued to below-investment-grade companies (junk) -- are very high on the list. Because of their senior standing, recovery rates on loans issued to companies that file for bankruptcy is about 70% vs. the 40% on bonds issued by the same company....175 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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