Yesterday's drop below critical support levels caused me to lose a little sleep last night. That's not acceptable. In each account I trade I purchased more protection. My favorite purchase was the SPY April 75 put. They're not too expensive since they're short term and out of the money. Just the cost of doing business.
Thanks again to the bankers, deregulators, the SEC, Greenspan, Bernanke and Hank. Good show mates.
"Adjusted for Inflation, Dow's Gains Are Puny" WSJ
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Question for you. I'm going to get a stock put to me upon expiration, barring a huge rally by Friday. I broke the cardinal rule about writing a put on a stock that I really didn't want to own, so lesson learned. Since I don't want to roll-up my position, would you suggest writing a deep in the money call against it, to eventually get it called away from me and collect a nice premium in the meantime? Or, would it simply be better to roll-up and eat my loss? Thanks in advance for your thoughts!
PC,
I have some doubts as to whether protective puts will really protect your portfolio. Have you calculated for argument sake if DOW goes down to 6000 and you are using the rule of 25%, would you have any gains? My thoughts are now more going towards to believe that a crash or downturn whatever you want to call it will eventually happen. How correct are we in our long sentiment? If we are not correct, we are not smart investors. By the way, I predict a drop in DOW after Obama's speech. Just a guess, but I hope not.
Anon - can you give me some specifics? What is the stock and what did you sell? That way we can compute cost basis and see what covered calls might work...
Smart - It depends on how many puts have been purchased. I've bought enough to hopefully keep things neutral. Yesterday I actually had 2 accounts that went up in value. I also have a lot of precious metals which are doing well. If the market has a bear rally I might purchase extra puts to profit. I'm definitely bearish until further notice.
Sorry about the Anon, the name is Ryan, I need to figure out how to sign up. Anyway, here's the deal on the put sale I mentioned above: Allstate (ALL), sold the Feb 22.5 for $1.22, ask is $2.80 after today's close, ALL closed at $19.74 today. Thanks in advance for your thoughts!
Ryan - first off it looks like ALL is rising today. Your basis now is 21.28. If you wrote the next month 20's you could get the cost basis below the price of the stock and if called away eek out a small gain. If it's not called away you could write the 20's again and lower your basis even more.
It also looks like ALL will go ex-dividend soon after options expiration so you would get some of that 8.57% yield.
With all the premium and dividend income coming in you should be able to profit on the trade.
Now we need to have a discussion about why you're trading financials :)
Good luck with your trading and thanks for sharing with us
Ryan - may I be so bold as to suggest that you write puts that are way out of the money? This market could crash. I also hope you've bought an index put or two for protection...I repeat myself a lot about these two things but I think that's the crux of how we can make money safely while others struggle mightily...
PC - still learning here so i may say something totally stupid. You repeat the importance of buying protective puts... i understand the reasoning of the protection - my question is: would it not be better to sell puts on a short index ETF? you dont have the time decay of buying puts on the normal index. ??
learning - great post! I'm going to have to chew on that one a while...the downside that comes to mind is the unlimited risk if the market were to rally....thanks for making me get my thinking cap on, perhaps you're on to something where time decay is on our side rather than against...hmmm
PC, it's Ryan again. First and foremost, thanks so much for the insight on my ALL trade, I completely forgot to consider the dividend. Second, why am I trading financials, great question. Simply put, juicy premium. It was my first and last I guarantee. I'm not new to options at all, but new to selling puts thanks in large part to your amazing blog, so lesson learned. Finally, due to my relatively conservative nature I always have some type of insurance (including long SPY puts), and I've been sitting in cash with a majority of my investments since December, 2007 (better to be lucky than good). And it's not bold at all to suggest protection, I know I speak on behalf of all of your followers when I say that we appreciate the advice. Thanks again!!!
Ryan - nice job being in cash and having hedges..we appreciate your input
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