Agree "in theory". But after this month I am now personally doing some serious introspection to figure out if I ever again want to sell premium. The high degree of ratified global contagion and global market coupling we are now seeing is severe. This month could have been a LOT worse if just a few more negatives came out at the worst time to drive it all down to the gutter. In my opinion, as a spreader, it's no longer a matter of getting higher premium when the "real" volatility is actually much higher. Technicals are blown out like wet cardboard in times like this. It's clear to me that its more than just speculative froth getting shaken out (either by design or by circumstance). I think its clear now that we have a very risky, complex and circular global co-dependency of currencies, derivatives, equities, bonds, economies and lots of good faith all cross linked. It as if nothing but good faith (with a non-ecumenical global congregation) is holding everything together. It's kind of like trying to contain a delicate balance of jellied pousse cafes with bail wire. This month demonstrated to me that the fundamental nature and character of the markets are forever changed. I doubt anyone on the planet knows how to ride or break this wild stallion. In my opinion, spreaders and traders everywhere are now subject to any single ripple or whim anywhere in the linked global community. The liquidity fan-out is high and the statistical probability of one nation's economy or market or politics upsetting every other market is very high. If the communist regime in China decides to change economic policy along ideological lines or even leaks a rumor of a tax etc. - boom there goes China. Then that ripples all over the planet. If the Japanese decide to toy with their interest rates or the Yen exchange - boom - there goes the Yen carry trade and the rest of the global markets reel. If Mr. Greenspan gets an urge to feel relevant again and wants to publicly buck or contradict Bernanke's assessment of the economic outlook to sell a new book - BOOM there goes the global markets again. It's now simply impossible to reasonably assess or calculate the odds of success (e.g. the risk) in any one period to any reasonable degree of certainty. Technicals can be "taken out" in an instant by high level government individuals or some ol' ex FED Chairmen deciding to fart against the current market trends in stark indifference to the hundreds of billions of dollars in evaporated wealth to get new speaking fees. At least in most gambling systems we know precisely what the odds are and can make informed and well reasoned decisions. But in this market the risk is not anywhere near as predictable. So we are now forced and psychologically conditioned to constantly operate to a "worst case" mentality. And a fear based investment posture is not conducive to beating the averages (inflation moth eaten 10 year treasures at about 4.5% ?). No, this market is now more like a complex poly-sided dice whose number of sides changes in mid-air as its tossed into the arena each day. So, I am beginning to think its NOT going to be profitable to be underwriting open-ended and emotional global risk for any amount of premium. Metaphorically, writing for premium is now like being an insurance company collecting triple the regular premium on insured homes while a half dozen hurricanes are lined up like bowling balls just off the coast and bearing down on your policy holders. :eek: For now I think I will play only at the fringe to the upside (given the extreme discounting and potential buying pressure I mean only at the stratosphere). I think I will only seriously play the downside again when I see the reaper swoop down deep to get a lot more trader blood flooding in the gutters. Until that happens I will limit my downside activity to opportunistically swinging in and out briefly like a vulture (maybe a day or two of risk exposure) to scoop up the dimes and quarters of flesh shaking out of the pockets of those still holding old calender PUT spreads. TS
The best way to guess at what could happen during a 2001-2002 environment is to go look at the records of cta's who were trading credit spreads during that time frame. There are a number you can look at, and you will find some interesting results. Keep in mind that survivorship bias plays a big role here. I.e. cta's that blew out in 2002 won't have their results listed anymore. This does not mean that YOU won't crash and burn if the next 6 months behave like February. But it does mean that there are traders who can do well in such an environment. So the short answer to your question is: No, all put credit spreaders will not get killed. Some will blow out, some will survive, some will do very well.
I have no clue what the future holds, but to me this lengthy commentary is another example of a common situation: The under-informed, under-educated individual investor jumping out of the market at the bottom. I agree that it may be intelligent to scale back, but that's because there is plenty of reward to go along with the risk. Mark
And to me this self-contradictory statement is yet another example of conflicted irrationalism and egotism trying to pass itself off as "intelligent trading". How can you admit to being clueless in the first sentence then call others stupid for not seeing a clear bottom? Is this peculiar condition of yours an occupational side-effect that all old traders can expect to come down with as they get burned out? Or do you bet against yourself & make your own private market by buying your shorts at higher than going market premium in another account? It was a rather "invigorating" front month for most of us so let's just drop it here. Personally I am long in the market overall and quite bullish but I expect a lot more downside chop over the next few weeks. If we get another good rip down 30 or so points I'll sell more premium 50-60 below the new lows when VIX is up near 20. Peace, TS
Hello, I've been thinking that instead of doing a covered call on SUNW, I might as well go naked. Now when buying shares (and call or no call, does not matter much here) and they go down, I can average down. The same I can do with puts if I am not mistaken, right? So SUNW closed today at 6.24 The April 6 put pays a premium of 0.13. Now my thinking goes that if it closes at April expiration around 5.65 or higher, I roll over, if it is further down, then I could either roll over and sell another one or two 5 dollar puts or cover the ITM put and sell so many 5 dollar puts so that my loss would be covered. Obviously, come next expiration SUNW might have dropped into the 4 dollar area, but I wondered what you think about this. I would not do that on a 20 or even higher priced stock, since the way to zero is a lot more, but with a 6 dollar stock, it looks okay. (I am also looking at TA, FA etc.) Any comments are much appreciated! Thanks, gis
If the market falls now as it did back then the answer is a very big YES...go back and see how much it both gained and lost in one month also how big some of the sets were compared to close. I think it would be a BEAR to trade (pun intended ) FOTM IC's...but perhaps a good market to trade call credit spreads with some hedges in place. Having said that I don't see this market anywhere close to that market...remember we were coming off "bubble" years when things were insane...1000p/e's etc. This market is reasonably priced and baring a major recession I just think we may limp along.
THnaks for the responses guys and gal.... and sorry for the late replies. Went to sleep after my post If it drops 50% in two years period gradually, it creates the best trading environment for premium sellers (esp FOTM sellers) for the following reasons: Yip, good to see your optimistic response but that 50% drop in that 2 years WAS NOT GRADUAL ! 1. Premium is high ( usually IV is high for a dropping market) 1. Agree that premium is high and you can write your spreads FFOTM but it won't compensate for the speed with which the SPX or RUT will approach your shorts. 2. If it is a slowly declining market (assuming 2% a month), it won't threaten your FOTM put spread. 2. This is not a slowly declining market LOL. ... This more like 10% a month, which will threaten your FOTM put spreads. This makes the 60 pt SPX drop on that Tuesday look like a walk in the park. EDIT: Sorry for the multiple editing, just trying to perfect my replying technique