Complacency

Am I the only one who is frightened by the news?

It's  bad enough that the US automobile industry is facing bankruptcy, but the bad news doesn't end.  Last evening Dow component Alcoa (AA) announced it
will reduce output, and cut its global workforce by 13% (approximately 13,500 people will be out of work), in addition to
eliminating contractor positions. Alcoa's capital expenditures for 2009
will be halved.

Even VIX, the CBOE volatility Index, has been falling in recent weeks.  True, it's falling from historically high levels and is still substantially higher than it's average over its 20-year history, but it's still falling.  That is generally accepted as a sign of complacency, or 'lack of fear' by market participants.

VIX decline or no, I'm afraid.  I'm not predicting anything, but I am afraid that the dreaded 'D' word may come to pass.  What would that do to the stock market?

I am not going to be positioned for a market disaster.  All I want to do is to be certain I don't get slaughtered if everyone else becomes as afraid as I am. 

What are your plans? 

  • Getting long in the face of bad news?  Historically that's been the best time to buy.
  • Nothing special – just looking for individual trade ideas?
  • Buying (costly) puts?
  • Something else?
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8 Responses to Complacency

  1. inkblue 01/07/2009 at 9:37 AM #

    Currently I’ve been using iron condors, but I’m really worried about another crash down as well. I think the next crash down won’t happen till the fall just like in past years. I think we are definitely going into a depression -10% GDP, if we aren’t there already. I intend to sell vertical calls when I get the sense that we are no longer range bound. I don’t own any stock at all.

  2. WinterHawk 01/07/2009 at 12:29 PM #

    I use a signal I developed off the ISEE sentiment index. It’s screaming sell right now. Last sell signals it gave were early Oct 2007 and late May 2008. No way I’d write anything without some protection in place.

  3. Mark Wolfinger 01/07/2009 at 12:35 PM #

    If willing to sacrifice some potential profits for extra protection, you may want to consider getting your hands on a few extra puts (or strangles).
    See: https://blog.mdwoptions.com/options_for_rookies/q-a-protecting-iron-condors-with-extra-strangles/

  4. Mark Wolfinger 01/07/2009 at 12:38 PM #

    I agree. Writing without protection hadn’t felt right to me for several years now.
    The only exception I would make is for investors who prefer to accumulate stock. Those people can write cash-secured puts.

  5. Mike S. 01/07/2009 at 2:06 PM #

    Dear Mark:
    I have been reading several books on options and I have learned a lot, but there are a few questions I have that I still do not completely understand, I hope you are able to help me out!
    First of all, with writing uncovered puts/calls what are the requirements with major brokerages on this? How much in funds do you need and what do they require of you to be able to trade uncovered?
    When writing a uncovered put/call, there has to be a buyer just like when selling a stock. Am I correct on that? Ex. If I write 2000 contracts of an uncovered put, all of those have to be bought, correct?
    I have been learning about rolling strategies and how if you write an uncovered put if the stock price is currently at 15 and your strike is at 12.5, and if the stock drops to 12.5 or below to avoid exercise you can roll the option. Is there anything else I should know about rolling or can you help be better understand it?

  6. Mark Wolfinger 01/07/2009 at 2:29 PM #

    Hello Mike,
    Glad you are reading books. That’s a great way to learn about options and gain the perspective of different authors.
    The first and third questions require lengthier replies and I’ll post them as part of the regular blog – probably on Friday.
    There is no difference when writing ‘covered’ or ‘uncovered’ options. As far as the transaction is concerned, all that matters is that you are selling options
    Question two: ‘Writing’ a call means ‘selling’ a call that you do not own. You cannot sell if there is no buyer. Thus, writing requires a buyer, and a trade must occur.
    But, sometimes you get a partial fill. That mans if you want to sell 2000 options [MAJOR WARNING – 2000 CONTRACTS IS THE EQUIVALENT OF 200,000 SHARES, NOT 2000 SHARES], it’s possible you may only find buyers (at your price) for 1500 options. If that happens you only write 1500.
    Be certain you understand that one option = the right to trade 100 shares of stock.
    Mark

  7. Dave 01/08/2009 at 10:22 AM #

    Hi Mark
    Yes things look very bleak. I keep telling my 15 year old she’s lucky to be growing up in what will obviously be an incredibly interesting time in history– but truth be known– I am fearful and even a bit sad for all kids out there… We’ll see how it all plays out.
    My strategy in this market is simply writing spreads at market pivots– with a strong goal of avoiding stock ownership.
    Lastly; I want to mention that I finally bought and read your book. I HIGHLY recommend it to anyone that is fighting a losing battle with the tape. Not only has my trading turned around after many inconsistent years– better yet– I spend far less time beating my head against these monitors…
    Your work is appreciated!
    Dave

  8. Mark Wolfinger 01/08/2009 at 10:36 AM #

    Thanks Dave,
    Avoiding stocks may result is smaller profits if the market turns around, but I’m with you.
    Safety first. And I don’t expect the markets to turn around.