Archives For unbalanced condors

Market Overview By

June 29, 2011

Good Afternoon!

Bank of America

Many people are ecstatic about the $8.5 Billion payout BofA has to pay its mortgage holders. It is a great start, in many opinions, to help restore the integrity of the financial system. Random Walk has a different opinion in that if BOTH you and your attorney are not competent enough to read a contract, you are not competent enough to be a home owner. The whole mortgage meltdown was about one thing only – GREED, and there was enough blame to go around with the homeowners treating their home like an ATM machine being the primary devil in the woodpile.


The markets are currently up for the third day in a row with Greece passing austerity measure that will allow them to obtain loans and avoid insolvency. We believe this is a temporary relief rally, but nothing substantial which will carry over past this week.


The markets are a tricky call right now. With the fall below 12,000 and the subsequent run back higher , it is tough to gauge where this market really wants to go now. If we had a gun pointed at our heads we would reluctantly assume the next move is to the downside. Yet, because of the difficulty in picking a direction with a lack of any clear trend, positions like unbalanced 1-5 spreads, unbalanced condors, and Broken Wing Butterflies (BWBs) will perhaps be the best risk v. reward strategies to set up decent bets in both directions.

For more information about the BWB strategy check out Random Walk’s One Strategy For All Markets textbook:

Check out our Practicals Home Study Course to learn everything about the 1-5 Trade Strategy!

With LinkedIn’s IPO release last month (see here), many students have asked us what we have been thinking with regards to this recent emergence of the social networks.

Personally, I use Facebook at the most 15 minutes a day. No, I don’t play Farmville or any of that junk but I do keep in touch with a lot of my friends from school and such. I suppose when you think about how connected the world is, can you actually formulate how to value this?

As of last January, the supposed value of Facebook had been reported to be $82.9 billion (BusinessWeek). Here is my question though, how is the value of social media determined? Oh you can quote accounting statistics with regards to advertising space and such, but truth be told the users are what make and break a social network.

MySpace – The First Giant

Let’s take for example MySpace. The social network started by “Tom” and his search for some friends, was the first in the exploration of social profiles on the net. Of course, this was the thing to have before Facebook, and you usually asked people if they had a MySpace page (not a Facebook). Sadly, MySpace has fallen by the wayside as other social giants like Facebook have taken over.

Within what seemed like the span of a night, MySpace became unhip and deleted from your favorites folder. Of course, no worries for “Tom” though. If memory serves he cashed out before the fall of the Space (read here).

So where is the value? The user data, yes that is where the value is! Information on their users is what is being valued, and if that is true what if everyone shut off Facebook today? What would be the value?

Why is this important?

With the release of Facebook recently taking steps to go public later this year (read here), we are beginning to see the trend of social media entering the markets. In other words, could this be the next “” bubble?

Well let’s look at some historical data. The “” bubble burst in 2000. Below we have a graph of the DJIA Monthly closing from Oct 1998 – May 1999 and compared against DJIA Monthly Closing from Oct 2010 – May 2011.

(Image created by Random Walk – Data collected from Yahoo Finance)

Notice the blue line is the current trend from Oct 2010 until May 2011. Be aware the red line is the past trend in Oct 1998 until May 1999. This was approximately only about 6 months to a year before the actually “pop” of the bubble. Interesting if you notice the similar shape ticks from March into May, and I cannot wait until June’s numbers appear.

What could this mean?

With the emergence of social media, and their IPOs we could be looking at a market that is overcooking. Should we be prepared for a bubble burst that is just the same size? Well time can only tell, and honestly we will not have the housing bubble to fall onto when the bubble does pop. That is partly how we managed to stave off such a huge loss last time.

The Lesson

This would be a great candidate to demonstrate the sale of an unbalanced condor. A strategy that allows you time to be wrong, but makes great money when the event comes about. We have used this strategy several times this past year in Power Tag-Along 3 and 4. Something we will be looking forward to in Power Tag-Along 5 and future Tag-Alongs.

If you were apart of our Power Tag-Along 4, you saw how we used the idea of the unbalanced condor in our paper trade example of OIH (Trade #26 for those in Tag 4.) Currently, as of this article, we are seeing a 14% ROI (thank you drop in OIL and release of oil reserves yesterday!)

Perhaps we should all send Goldman Sachs a gift basket for telling everyone to get long a few weeks ago in oil?

What Susan Says

Don’t buy into the hype. Everyone may rant and rave how much the social media giants are worth, but in truth they are still babies. They haven’t stood the test of time yet. Although most heavy investors know this already, but those still new we thought we would just give you this heads up!

If you are interested in learning more about the Unbalanced Condor strategy be sure to contact Random Walk! They have some great practical materials for students wanting to expand their opportunities in trading!

Article Contributed by Random Walk’s resident Economist Susan Steward. For more, be sure to check out her other article contributions to Random Walk’s Options Blog!