Down 300! What did you do?

I hope you were in a position to take advantage of cheaper prices. We know that big market drops are inevitable. We just don’t know when they will happen, so it really is not possible to predict them. It’s also nearly impossible to hedge against a large one-day move. The talking heads on TV will tell you to hedge one way or another. The problem is that hedging costs money, so in order to get it right, you have to be a successful short-term market timer. Again – nearly impossible.

The best way to prepare for the inevitable large drop is to always keep plenty of cash in reserve. That way, you never run out of choices as you react to the market’s volatility. Here at Deep Pocket Options we are option sellers for time decay. Large drops are great opportunities because we can buy back a lot of our short calls for little money and we can sell new calls and puts (to build positions) at increased prices. When volatility goes up a lot (like yesterday and today, June 30) – option prices follow. People will pay more money for insurance when there is a storm outside!

On Monday, June 29, the DIA was down 2%. Our trading account was down about 1% and we sold some new puts along with buying back some cheap calls. That is the plan, so on a day when many market participants are wondering what to do – we just continued doing what we do every day. We are running a business with a clearly defined plan. We’ve been here before and we have structured our portfolio’s risk so that large drops do not cause us any concern. As always, we work every day to increase our income (Theta) while reducing our risk (Delta).

Greece is broke and has been broke for generations. This is no surprise to the Eurozone. The zone’s nations have thousands of year’s experience with International Banking. They will figure it out if they haven’t already. The Euro will be stronger if they actually do get rid of the huge drag coming from Greece. Puerto Rico is broke and again, this has been known for years. We had a huge market drop because these two issues suddenly were at the top of the news, but nothing had really changed from before. When you see a large move based on fear and not on new, unexpected events, you need to treat that as an opportunity.

The difficult thing about these opportunities is that we don’t know if they are one day, one week, or one month events. A two percent drop could be repeated the next day and the next so we always want to keep some cash in reserve. I’ve had margin calls in the past and have vowed to never get into that position again. It is a very scary thing when your Broker calls you to explain that you need to send more money NOW or they will start forced selling of your account. You want to be the person who is on the other side buying stocks from the people who are forced to sell in panic at the market price.

Stay optioned, my Friend!


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