Trading a different market.

2014 has brought us a different market, and it is time to change our thinking.

At Deep Pocket Options, we felt it was time to do an analysis of the portfolio from a different perspective. When markets are flat to rising, as they were most of last year, we can sell put options and watch them expire, over and over. In this market, with it’s quick deterioration, we now have a good number of in-the-money puts. We have a lot of cash in the portfolio, but it’s time to think about what would happen if every single position was put to us. In that scenario, we would be forced to use our cash to buy shares as we are “put” all the stock we have contracted to buy when we sold the puts.

We have completed that analysis today, and we are as fully invested as we care to be. We do not ever trade on margin, and if we sold any more puts and then had every share put to us, we would use up all of our cash. So, we are now what we consider to be fully invested, even though about half of our account is in cash. That cash has been committed and we will always stay in a position so that we can take advantage of opportunities as they present themselves. We are now “call sellers”, and not “put sellers.”

Selling more puts has become too risky. Selling calls now reduces portfolio risk. Selling calls will also reduce our potential income should the market rise beyond our call strikes, but there are other things to consider. In the present environment, with high volatility, we can get very good prices for selling our calls. You want to be an option seller when volatility is high. We have determined that selling puts would add a type of risk (potential use of margin) that we do not engage in. The opportunity now is in call selling, but patience is required. We have to wait for the “up” days to be selling calls, and that is not always easy when it seems that every day is a down day.

Today was an “up day” and we were selling calls. We sold calls in XLE, XLI, GE, INTC, DIA, and VZ, among others. We hold stock in each of these symbols, either as shares or as cash covered puts. Our Theta went up, and our Delta went down. We have quite a bit of Delta left to hedge, so any up day in the general market or any particular symbol, we will sell. By following these rules, we manage our total portfolio risk and maximize the income that we generate.

Trade what you see and not what you hope. Stay invested, my friend.


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