SS+D FINANCIAL NEWS AND INFORMATION

September 30, 2011

"PROTECTED PORTFOLIO" AND MARKET VOLATILITY

Since 2009 SS+D Financial has made good use of long-term option combinations on broad indexes to reduce volatility in our clients' portfolios. Our use of options protects against market losses by forgoing some potential market gains. The option strategy has worked exactly as we predicted. When the market soared last year the option strategy lagged the market. When the market dropped this past August the option strategy lessened or eliminated our clients' losses.

High market volatility, like we have experienced lately, makes our option investment strategy more attractive in two ways. First of all, our clients who employ this strategy aren't as fearful of wide market swings. Secondly, as volatility rises, we can get more downside protection without having to give up as much market gain. In many cases, we can even get a generous upfront premium on the option combinations. Here are some examples:

As of this writing, the price of SPY (S&P 500 Index ETF) is 115.29 and VIX (volatility) is 40.93.

MARKET NEUTRAL -- You could invest $95,030 in10 option contracts (representing 1,000 shares) on SPY expiring in December 2012. Between now and then, you could get all of the profit on an increase in SPY up to 134 (17.6% above its current price) plus a premium of $970. The maximum profit, including premium, would be $19,970. If SPY ended at its current price, you would keep the $970 premium. You would not incur any loss unless the SPY went ended below 95.03 (17.6% below its current price). For every dollar SPY ended below 95.03, you would lose $1,000.

BEARISH -- You could invest $85,800 in10 option contracts (representing 1,000 shares) on SPY expiring in December 2012. Between now and then, you could get all of the profit on an increase in SPY up to 121 (5.00% above its current price) plus a premium of $4,200. The maximum profit, including premium, would be $10,200. If SPY ended at its current price, you would keep the $4,200 premium. You would not incur any loss unless the SPY ended below 85.80 (25.6% below its current price). For every dollar SPY ended below 85.80, you would lose $1,000.

BULLISH -- You could invest $103,440 in10 option contracts (representing 1,000 shares) on SPY expiring in December 2012. Between now and then, you could get all of the profit on an increase in SPY up to 144 (25.00% above its current price) plus a premium of $1,560. The maximum profit, including premium, would be $30,560. If SPY ended at its current price, you would keep your $1,560 premium. You would not incur any loss unless the SPY ended below 103.44 (10.2% below its current price). For every dollar SPY ended below 103.44, you would lose $1,000.

To learn more about our “Protected Portfolio” strategy, click here.