I charted all stocks I have an open position in. I’ve been getting spanked for more than a month now and have saved myself from losing as much as I could have by selling naked calls. I would’ve done better by buying some protective puts, but I didn’t. I’ve sold all my calls far out of the money in the hopes of a rally after the bailout bill passed. It passed today and we saw the markets sell on the news. That means I should sell more calls or just get out of some of my losing positions.
There’s a new wrinkle though. Now we hear that the Fed could cut interest rates by 50 basis points any day between now and their next meeting in a couple of weeks. If they cut, the dollar will weaken again and commodities will go up. I’m back in my quandary of not knowing what to do. That always leads me back to the charts to help figure out where I should make my next move. What I see on all of these is that they could all be near support. So far for the past few weeks they’ve broken support at each opportunity. Nothing says this time will be different. Even so, I’m waiting until Monday to trade any more to see how a weekend of thinking makes the markets react. We have two weeks before October options expiration. The VIX is still historically high this afternoon. That means we have not a lot of time for this expiry and a lot of volatility remaining.
I charted all of the following stocks between 11:30 am and 2:00 pm today during the rally, before the sell off.
AA might find support near 20 and at the least should come back to the upper side of its trading channel before going much lower.
CELG could find support just under 60. It did for a while this summer.
CHK just landed around 30 on the three year trend line of support. On the other hand, it just broke lower than the downward trading channel it has been working through.
CMI has been in a free fall too, but looks like it’s hitting the same low that held in the first quarter of this year.
DRYS is still ugly. It hit the line of lower lows and bounced sideways. The line of lower lows needs to break, but even then it is going to have a hard time getting into the 60s.
FCX is hitting the lows of three years ago with copper at multi-year lows. Once copper turns, FCX will rally. Even staying in its downward trading channel you could see it up to $70 before turning lower again.
JOYG broke support a handful of times recently, but at this reduced price, close to its three year lows it might be ready to rebound or at least stop falling.
MON slipped hard yesterday, but found support at the range of last year’s third quarter. MON will have a hard time making it above $100 in the near term.
QCOM hit support at the three year rising trend line of higher lows. $45 will be tough to get past and $50 looks out of reach for now.
TDW hit the three year trend line of higher lows and came up some. That happened to be along another trend line going the other direction. Which line wins next week will be interesting. I could see TDW back towards $60 fairly soon.
USO has been sliding as oil falls with lowered demand and the strengthening dollar. USO hung around the upper $60s for months, ended eight months ago. That’s my line of expected support again. The upside looks like a max of $90 is possible in the near term.
I’ve been in your position during past down markets. The one strategy that always failed me was the sale of naked calls in an attempt to reduce downside losses. I’ve given that up as a bad idea and am passing along advice from a >30 year professional trader: 1) The cash collected is too little to provide any significant help on a continued downside, but a strong reversal may cause significant damage; 2) As you already know, protective puts would have been better.
Have you considered selling put spreads instead of naked puts – perhaps even iron condors when your opinion on the stock does not include a substantial rise?
I used to sell naked options by the handful; now I never sell a naked put or call. That method suits me. I’m not telling you what to do, because I know my methods are not for everyone.
PS I subscribed to your feed.
Mark,It looks like we have taken the same fork on the trading track. I agree with your comments entirely as my experience has shown them to be prudent. I would add that there is a time to be long, a time to be short and a time to be flat. Considering the confusion the OP is displaying perhaps now might be a good time to consider biteing the bullet.Personal experience suggests that it’s very hard to keep your thinking rational and controlled whilst your being ripped apart by a bear!
Good Luck
Johno
You both make good points. I think I enjoyed the “time to be long” too much and didn’t face reality when I saw it turn last year and I should have switched my trading strategy to include buying more puts at lower strikes as a safety net. Although it would’ve reduced my returns in the short term, I would have saved a sh/tload and been better off today. I’ve learned and won’t repeat the mistake.
I’m going to have to spend some more time thinking about Not selling calls. I’ve had mixed results, but could see a big snap making me miss gains. I’ve been pondering this for a while, but needed a slap in the face apparently. Thanks for your comments and for subscribing to my feed. I’d appreciate future input as I adjust my trading model.
Good post. I think the bailout is clearly not going to address the underlying problems the market is dealing with. When we get closer to earnings season we will see many of the stocks go lower as they begin to miss and lower their guidance.
When the stock is at the lower level their prices will defiantly rise in near future. There is a point where the stock can’t decline more. So wait for the right time to buy and sell the stock. Nice article 🙂
I remember getting squeezed out of my DRYS $110 puts, I only had 1 or 2 but they gapped it up on earnings. These markets have really taken investors to the cleaners, how the hell do so many stocks fall from $120 to $20? Massive hedge fund deleveraging, those $120 prices were not real money just monopoly money.