This is the Big One
Futures were down over $100 right before the market opened on Monday morning, August 24, 2015. This is a number most people had never seen on their screens.
Some of us have seen numbers like that. These things happen and when they do, there is little you can do AT THAT TIME! You should always have a prepared plan because market crashes are never predictable, in spite of what the “gurus” will try to tell you. At DeepPocketOptions we never trade on margin and we never commit all of our cash. If you didn’t build your “crash wall” before last week, it’s too late.
What to do now, – in the aftermath? Number one is stay calm and don’t panic. Number two is stay right here at Deep Pocket Options. We will be working through the rubble and using options to trade for cash flow, but at the proper time. Over the next few weeks, we will be using all of the stocks we bought during the crash to build a large covered-stock portfolio, – so stay tuned.
Let’s start with a brief review of the basic strategy. We start with an all-cash account and sell cash-covered puts against that account. There is always more than enough cash in the account to buy every share of stock in worst-case scenarios like this one. So on Monday August 24th, nearly every put has been exercised against us. We own many shares, we are short a very small number of puts – and yet STILL have enough cash to buy every share. This was due to our plan, which is reviewed once a week, every Monday. We always know, to the dollar, our short put exposure in a worst case scenario like just happened. Now, our Delta is very high, our Theta is very low and we have some work to do. As the market recovers and volatility remains high (which it will for a time) we will have tremendously profitable call-selling opportunities.
Our cash is basically 100% committed now, as we planned. We are short a few more puts and some will expire this week, some in September. Mostly, where we were short puts, we own shares now. Our worst case scenario will take portfolio cash down to about 5% of the total. In normal markets, we usually try to keep the cash level at about 50% (or more) in our cash-covered put portfolio. Now we have been flipped to the other side and instead of focusing on new put sales we will refocus on generating cash flow by selling calls. For the first time ever we do not have any cash available to sell new puts unless we want to use margin but, we don’t use margin. It’s too risky and not necessary for our trading strategy.
Our account value has dropped along with the market. This is the downside of what we do, but it is not unexpected. As we begin our call-selling program, we will be reducing risk and increasing income every day. We have set a pre-determined target for daily cash flow and we expect to limit our call sales to that number each day. This will give us a predictable income and leave plenty of room on the upside should stocks recover strongly. Take the longer path, trade your plan, and try not get whipsawed out of positions.
Stay optioned, my friend!