Stocks Fell Off A Cliff in Late August - What To Do Now
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1. 2Q GDP Came in Much Stronger Than Expected

2. Stocks Fall Off a Cliff in Late August – Now What?

3. Options 101: How to Use Them to Your Advantage

4. Introducing ZEGA Financial’s High Probability Options Strategy

5. Why Option Selling (Writing) Can Be So Attractive


What an absolutely CRAZY couple of weeks we’ve just been through! The collapse of stock prices around the world has stunned investors. By some measures, the plunge in the Dow and the S&P 500 in August was the worst in 75 years, even worse than the Crash of 1987. While I advised readers to reduce long-only equity exposure significantly in April and May, I was not expecting a 15% spike down in just a few trading sessions.

Later in today’s E-Letter, I will introduce you to the latest money manager to make it on to our recommended list. This money manager specializes in buying and selling options on stock index contracts. This is one of the more unusual strategies I have seen over the years, but when you see the results, you’ll understand why I’m so excited to add ZEGA Financial to our stable of recommended Advisors.

Before we get to the above issues, let me briefly comment on last Thursday’s better than expected report on 2Q Gross Domestic Product.

2Q GDP Came in Much Stronger Than Expected

The Commerce Department released its second estimate of 2Q GDP showing surprising growth of 3.7% (annual rate), up from 2.3% in the first estimate in July, and well above the disappointing 0.6% in the 1Q. The latest number was considerably higher than the pre-report consensus of 3.1%-3.2%.

The report cited positive contributions from consumer spending, exports, state and local government spending and nonresidential fixed investment. The price index for gross domestic purchases, which measures prices paid by US residents, increased 1.5% (annual rate) in the 2Q, in contrast to a decrease of 1.6% in the 1Q.

While the latest estimate of 2Q growth is encouraging, things still don’t look good for the 3Q. The Atlanta Federal Reserve’s GDPNow estimate for the latest week shows 3Q GDP rising only 1.2%, down slightly from the previous week’s estimate. This number will change as the Atlanta Fed gets more input, but it does not look like the better than expected momentum in the 2Q will carry over to the 3Q. I’ll keep you posted.

Stocks Fell Off a Cliff in Late August – Now What?

Unless you’ve been living under a rock, you know that stock markets around the world collapsed in the last couple of weeks. By some measurements, the latest plunge was the most severe in 75 years. On Monday of last week, when the Dow Jones plunged over 1,000 points on the open, the market closed more than four standard deviations below its 50-day moving average. Not even the crash of 1987 got that oversold relative to trend.

From the high in June to the intraday low on August 24, the Dow lost over 15% of its value. While I advised my readers to reduce exposure to long-only equity strategies in April and May, I did not expect such a dramatic collapse. On the other hand, with a market that has been virtually straight up for over six years, you can never rule out something like this.

Dow Industrials

There were multiple worries around the world that sparked the global selloff. There were fears that China’s economy was slowing much more than its government admitted, not to mention that its stock markets lost apprx. one-third of their value in June and July, and the government  devalued the yuan by 4% from August 10-12.

There was also a growing fear that the US Federal Reserve would hike the Fed Funds rate at its September 16-17 policy meeting, a fear that continues today despite the recent rout in the equity markets. In addition, the recent Greek bailout had not been finalized, and there was still concern that Greece could leave the EU. There were other factors, of course, but these were the most cited catalysts for triggering the plunge.

Stocks drifted lower in the days leading up to Friday, August 21 when the Dow closed down over 500 points. It was widely expected that the People’s Bank of China would announce new measures over that weekend to stabilize its stock markets. However, no such news was announced over the weekend, and stocks around the world plunged lower on Monday morning, August 24.

The pre-open consensus on that Monday was for the Dow to open 500-600 points lower. Yet in just a couple of minutes, the Dow was down by 1,086 points on the open! Volume spiked, of course, and the VIX (volatility index) soared to the highest level since late 2011.

While the Dow and the S&P 500 have recovered modestly from the close on Monday, August 24, no one knows if we have seen the bottom yet. I wouldn’t bet on it! I will not be surprised to see these markets at least test the lows seen last week, if not move even lower before we’re done.

Options 101: How to Use Them to Your Advantage

Now that stock market volatility has soared, this may be a good time to consider some of the potential advantages of using options on stock index futures. Also, since I will be introducing you below to our newest recommended money manager – that invests in options on stock indexes – today may be an opportune time to review how options work, and how they can be profitable in the right situations.

Without getting too technical, here’s what you need to know about options as it pertains to this discussion. The buyer of an option contract pays a “premium” for the right to buy (“call” option) or the right to sell (“put” option) the underlying asset at a later date at an agreed-upon price.

Buyers of options often do so as a sort of insurance policy to protect them against large market moves in the wrong direction. Hence, they realize there is a good chance the options they buy will expire worthless (more on this below).

The seller (also called “writer”) of an option contract earns the premium paid by the buyer and is obligated to sell or buy the underlying asset at the agreed-upon price within a specified period of time– if exercised – and that is the key point.

The majority of options on futures are never exercised and die worthless. In that case, the seller (writer) of such options gets to retain the full premium paid by the buyer.

Let’s take a look at the Chicago Mercantile Exchange (CME) where options are traded for the S&P 500 Index and the Nasdaq 100 Index. Many options traded on the exchange were never exercised and expired worthless.

Put differently, the sellers of CME options were often able to keep the premium they received from buyers.

This is very important because the money manager I’m about to introduce you to sells options on stock indexes traded on the CME.

Introducing ZEGA Financial’s High Probability Options Strategy

ZEGA Financial, LLC is an investment manager based in West Palm Beach, Florida. The two founders of ZEGA spent over a decade of their careers as executives at TD Ameritrade, one of the largest national brokerage firms.

Their strategy is called the ZEGA High Probability Options Strategy (“HiPOS”). This strategy is very different from any other program I’ve seen before. Its goal is to generate returns by selling options on major equity indexes, in an attempt to take advantage of volatility in the markets. ZEGA HiPOS is a true “all weather” market strategy or “non-directional” strategy (as we call it), having the potential to make money whether the markets go up or down.

Since the inception of ZEGA HiPOS in November 2010, their Aggressive Growth strategy has delivered annualized returns of over 28%, net of all fees. Their worst drawdown was 20%*. See the ZEGA Fact Sheet for detailed performance information on HiPOS Aggressive Growth Strategy. As always, keep in mind that past performance is not necessarily indicative of future performance.

ZEGA Performance

Why Option Selling (Writing) Can Be So Attractive

So how has ZEGA been able to achieve these performance results? They use a very disciplined approach and only invest when targeted returns exceed calculated risk. ZEGA’s main strategy is to sell options that are nearing expiration, that are likely to expire worthless and hope to keep the net premium collected.

The options positions (S&P 500 or Nasdaq 100) have expirations within 30 days and the strike price must be far enough out-of-the-money – thus the low probability that the options will be exercised. There is a natural “time decay” of near-expiring options, as you can see below:

Time Decay of Options

ZEGA continuously monitors the positions, applying disciplined exit criteria and making adjustments to fit the risk/return expectation of the strategy. The strategy moves to a defensive posture if the one-month loss approaches their exit criteria. ZEGA may also take profits early and exit a position if the markets move favorably early enough in the lifecycle of the trade.

More About ZEGA Financial, LLC

We recently completed our due diligence on ZEGA Financial, LLC including an on-site visit to their offices in West Palm Beach, Florida and met with ZEGA’s founders, Jay Pestrichelli and Wayne Ferbert. As noted above, they both cut their teeth in the executive suite at TD Ameritrade. There they learned to break down the complexity of investing in the stock market into manageable chunks, and gained extensive experience in trading options. They also wrote the book, Buy and Hedge, The Five Iron Rules for Investing Over the Long Term. “

Jay and Wayne went on to found ZEGA Financial and develop the High Probability Options Strategy. This strategy is offered in three different versions with varying risk profiles to meet each client’s individual risk tolerance levels: Aggressive Growth, Moderate Growth and Income. Halbert Wealth will help you determine which of these three programs may be right for you.

As you probably know, there are millions of investors who bailed out of the stock market in 2008 and 2009 – and many have never gotten back in. Since ZEGA is non-directional – meaning it has the potential to perform well in up-or-down markets – HiPOS offers investors who are still on the sidelines an opportunity to get back into the market now. The minimum to open an account is only $50,000.

What’s the Next Step?

Options and options strategies can be complicated, so please contact one of our Investor Representatives to discuss ZEGA’s HiPOS program in more detail and answer any questions you may have. Given that this strategy is non-directional – meaning it has the potential to perform well in up or down markets – now may be a great time to add ZEGA to your portfolio.

Again, you can CLICK HERE to see the actual performance of ZEGA’s Aggressive Growth strategy. If you would like to learn more about this strategy, or see performance information on their Moderate Growth and Income strategies, contact us in any of the following ways:

  • Give us a call at 800-348-3601 and ask to speak to Phil Denney or Spencer Wright
  • Send us an e-mail to [email protected]
  • Visit our website Managed Strategies page by clicking here

We will also host a live webinar with ZEGA on Thursday, September 10, at 3:00 pm Eastern. Click here to register.

I hope you’ll seriously consider this non-correlated options strategy as a complement to your existing portfolio.

Wishing you profits in these crazy markets,

Gary D. Halbert


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 09-02-2015 2:57 AM by Gary D. Halbert
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