Gaming the market…

Some headlines from the press tonight: “…any rebound may be short lived”, “…the shakeout in stocks is likely to persist”, “…scared….get out of stocks”. It’s hard to find anything positive – so you would think the markets are falling apart.

But, what has changed lately? Little. If we go back just 3 weeks to March 19 when Fed Chair Yellen issued her “6 months” comment, we have gone nowhere at all. The DIA closed at $162.16 today, and on March 19 it closed at $162.19, virtually the same level. There has not been a surprise structural change. Everyone knows that the Fed is getting out of the QE morass. I guess you could guess that maybe her comment unhinged the markets, but is 3 weeks enough time to determine that? I doubt it. The focus on the financial press is very short term, and the daily news flow is based on emotions and even hysteria. Companies are doing the same level of business that they were 3 weeks ago in an economy that is slowly improving. Companies are able to make money and increase efficiency through technology, even grow their businesses without hiring many workers. That’s today’s reality.

Let’s try to examine the numbers without the emotional veneer. The markets are strong and are near all time highs. We have been down for 3 days in a row and all the talk is about the wheels coming off. That’s just not likely. In a bull market, we have down days – it is just that simple. We also have down weeks and down months. Markets are down 3 days in a row from time to time, and they can be down 4 days in a row, but not often. Down 5 days in a row and you are getting into rare territory. This is a simple numbers game and markets go up, markets go down. Buy low, sell high or maybe in your options portfolio – sell high and buy low.

As the market drops my options portfolio loses value, and a lot of that is due to rising volatility. Volatility spikes are short lived, usually just a few days. As the VIX subsides, options lose value quickly, so all the short options get cheaper and the portfolio comes back rapidly. I’ve experienced this many times. I do look for one thing – and that is my level of Delta as weighted to the DIA. It usually hits a high of around 10,000 during large market drops like this one. Today, it was around 6000, so I am very comfortable with my position, which is also generating about $1200/day in time decay. If the market continues down violently from here and my Delta approaches 10,000, then I get concerned and take action. Your portfolio will be different, but you should know your Delta’s max pain level and use it as a warning.

Updating the WalMart trade – we collected some time decay over the weekend, so even though the position lost $24 today, we have gained since last Friday and the total P&L YTD is now -$290.

Relax. Markets are OK until proven otherwise. We are down a little from the very recent all time highs. This is when you buy.

Stay Optioned, My Friend.

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