Momentum Trading: The New Alchemy

Posted: 24 Oct 2016 Last revised: 18 Sep 2020

Date Written: August 8, 2000

Abstract

Momentum traders buy stock (often on margin) as prices rise and sell as prices fall. In essence, they are trying to obtain the benefits of a call option — upside participation with limited risk on the downside — without any payment of an option premium. The strategy appears to offer a chance of huge gains with little risk and minimal cost, but its real risks and costs become known only when it's too late — after the strategy has failed, and taken markets down with it.

Keywords: Momentum Trading, Momentum Investing, Tech-Stock Bubble, Internet Bubble, Option Pricing Theory, Black-Scholes-Merton, Option Replication, Call Options, Leverage, Margin Calls, Portfolio Insurance, 1987 Market Crash, Long-Term Capital Management, LTCM, Active Extension, Enhanced Active Equity

JEL Classification: G10, G13

Suggested Citation

Jacobs, Bruce I., Momentum Trading: The New Alchemy (August 8, 2000). The Journal of Investing, Vol. 9, No. 4, pp. 6-8, Winter 2000, Available at SSRN: https://ssrn.com/abstract=2447039

Bruce I. Jacobs (Contact Author)

Jacobs Levy Equity Management ( email )

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Florham Park, NJ 07932-0650
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