Stock Options Trading Idea of the Week
How Bad Was it?
A couple of months ago, I conducted a 10-year back test on volatility on SPY, and found that if the same risk profile graph could have been created over that time span, there would not be a single 12-month period when the Mighty Mesa stock options trading strategy would lose money.
Over that 10-year period, the worst monthly drop occurred at the 9/11 terrorist attack when SPY briefly fell 19.7% (and then recovered completely within two months). Over those 10 years, SPY fell by over 10% in a single month only 5 times, and it rose by over 10% in only 3 months. When we set up our Big Bear Mesa stock options trading portfolio less than three weeks ago, it seemed prudent to have a portfolio that would gain 20% even if the stock fell by 10% in one month. We later expanded this coverage by adjusting so that the stock could fall by 16% and we would still make a profit. In the entire 10 year back test, it had not fallen that far.
So far, this expiration month, SPY has fallen as much as 34% (from a start of $126.70 to a low of $83.58), or more than double its largest monthly loss over the past 10 years. This is truly a once-in-a-century event (which is even longer than most lifetimes) for stock options trading.
Should You Bail Out Now? That is the question being sent to me by dozens of subscribers. As far as my personal investments are concerned, I am staying the course, for at least two reasons:
This market will eventually recover. Only the timing and the speed are unknown.Our options strategy is the fastest way I know to recover from this market crash.
Last week, I personally borrowed from my home equity credit line and added to my stock options trading positions. I did it carefully and slowly, however, legging into positions by placing orders half-way between the bid and asked prices. When markets get as wild as they were last week, the bid-asked spreads were big enough to drive a truck through.
It was absolutely the worst time to panic and liquidate a stock options trading portfolio. For those subscribers who did so, I feel sorry for them. They got horrible executions. They would have done much better to wait until expiration when at least the expiring options could be bought back at near their intrinsic value.
When all else fails, try laughing instead of crying -
NEW STOCK MARKET TERMS for 2008 and beyond.
CEO --Chief Embezzlement Officer.
CFO-- Corporate Fraud Officer.
BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.
BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewellery, and the husband gets no sex.
VALUE INVESTING -- The art of buying low and selling lower.
P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.
STANDARD & POOR -- Your life in a nutshell.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
MARKET CORRECTION -- The day after you buy stocks.
CASH FLOW-- The movement your money makes as it disappears down the toilet.
YAHOO -- What you yell after selling it to some poor sucker for $240 per share.
WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.
INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse.
PROFIT -- An archaic word no longer in use.
Andy's Market Report
Objective analysis and cool conjectures aside, what the hell just happened? The national calamity that occurred this past week was indeed one for the history books.
Ten trading days ago the Dow was above 11,000. On Tuesday the blue-chip index hovered slightly above 10,000. Thursday the market closed at 8,579. Friday it dipped below 8,000 before the late-day rally to close the week at 8,451.
The S&P has lost over 41% during the course of the past year. Approximately 25% of that loss has occurred since Sept. 29th, the day every bull disappeared into thin air and the trend of historical heavy selling began.
The S&P dropped 3.9% Monday, 5.7% Tuesday, 1.1% Wednesday, 7.6% Thursday and 1.2% Friday. The major market benchmark was lower 18.2%, just 0.3% shy of the one week record.
By Friday 75% of the issues on the NYSE had moved to new 52-week lows, a sobering, historical feat that gives us a glimpse into the severity of the latest crash. Yes, it is a crash. The highest level was previously 58%.
For the week, the Dow, S&P, Nasdaq and Russell were lower 18.2%,18.2%, 15.3% and 15.6%, respectively.
So how did this all happen? Did we not have an accepted bailout plan? Short selling was halted right? Didn't the Fed lowered interest? The goal was to unclog the credit market, the engine that drives economic growth, but the actions were too little, too late, at least from a short-term sentiment perspective.
I could give you so many different clichés to sum up the reason, but I don't think that is necessary. We all know that none of them have managed to sooth the short-term psychological woes of the market.
The lack of credit has seized the market. However, there were some glimmers of hope that entered the market late in the week. On Friday LIBOR rates dropped from 5.07% to 2.47%, a move that should boost confidence to the credit market and the stock market. Moreover, commercial paper rates dropped considerably.
However, the focus on Friday shifted to the upcoming G7 meeting has the attention of everyone. The meeting is being looked at as a pivotal moment in what has become a global credit crisis.
On a technical note, well, the market has reached historical extremes and over almost all time frames. Therefore, I do not think I wish to bore all of you with the gory details. Just know that we are at levels never seen before. Will this newfound precedent continue or revert back to the mean like we have seen in the past? I want to side with history. I do think a short-term bounce is coming early next week. Of course, I thought that would occur last Thursday and Friday so as you can see Mr. Market frequently proves all of us wrong, particularly when history is being made.
I do think when the rally occurs that it will be sharp and violent. Once the shorts start to feel the pain on the upside we should see hordes of sellers hit the button. I would not be surprised to see the move close the enormous gap from 10/6. However, I think that is where the selling could once again move back into the market. So, keep a close eye on how the market reacts once it reaches that level.
Overbought/Sold Condition Report
Overbought/Oversold for October 13, 2008
Major Benchmarks - Dow (DIA) - 7.3 (very oversold)
- S&P 500 (SPY) - 7.1 (very oversold)
- Russell 2000 (IWM) - 8.0 (very oversold)
- Nasdaq 100 (QQQQ) - 7.6 (very oversold)
- Emerging Markets (EEM) - 7.0 (very oversold)
Testimonial of the week
"The last few weeks have certainly been excitingly eventful, and I empathize with other folks. The last time there was a "meltdown" I followed your subsequent advice and went half-bear, half-bull, then took flight on the wings of the butterfly strategy. As a gardener I have occasion to watch those buttery bugs flitter up and down, seemingly at random -- no beelines there -- yet landing on all flowers full of fresh nectar and drinking from each and every one, just like their apian cousins. Like the bees, however, I've made an effort to create a stash for hard times and set aside next year's worth of expenses in money market funds (about 15% of the retirement account) just in case of "rain". Now that it's coming down in buckets I can stay dry and wait it out.
Thanks for your latest comments. I'm both distressed by the turn of events and reassured by your even-handed tone and advice. It's good to read it, sensing that this bothers you, too, yet taking the time to tell all us 'Tippers'. Imagine reading an email like this from Peter Lynch =:)" Emilio 10/13/08