from the desk of Dr. Terry F Allen

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Finding Lessons in a Trade

Last week I told you about a bullish short-term bet we made on SVXY because the stock had dropped over $3 in the previous week (and historically, 4 out of 5 times when that happened earlier this year, the stock rose at least $3 in the subsequent week).  We placed an order to sell half the calls if they had doubled in price, and that occurred on Tuesday.  On Thursday, volatility soared due to the plane being shot down over Ukraine and Israel invading Gaza.  It looked like we would just break even on the trade since  we had recovered the initial investment, but then, on Friday, the stock rallied $6 and we were able to sell the remaining half for enough to give us a 32% gain on the trade.  Not as much as we had originally hoped, but a gain of any sort is always welcome.

Terry

Finding Lessons in a Trade

The big lesson from our experience last week, one that we have had many times, is that there is nothing wrong with taking all or some of your gains off the table when you can.  We were hoping for a 200% gain on the call purchase but sold half of our positions when the price had doubled.  This insured that we would break even at worst.  Anything we could sell the remaining calls for would be profit.

If we had not taken the gain on Tuesday, it would have been a losing week.  As the old saying goes, the bears make money and the bulls make money but the pigs get slaughtered.

As I write this Monday morning, SVXY has fallen another $3.50.  Does that mean we should buy a short-term call in hopes that it will go higher by at least $3 in the next week?  Not necessarily.  This time around, the drop in SVXY (caused by a spike in options market volatility – VIX has gained 12% today) does not seemed to be caused by a specific world event like it was last Thursday.  This time, it feels like a growing unrest of the market in general is taking place, and volatility might not fall back as quickly as it did last week.  This time around, we do not advise making a bet that volatility will fall in the very short term.  Best to sit on the sidelines when a spike in volatility does not seem to have occurred from a specific event that will most likely be forgotten in a few days.

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I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

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