Is Anyone Bottom Fishing?

Addendum added one hour before the markets open:  This post was written last night.  This morning futures are limit down.  I have no idea whether this is bottom fishing opportunity, but I suspect almost everyone will be afraid to buy.  I know I am.

As discussed in an earlier post, writing naked puts (when you have enough cash in your account to pay for the stock, if you are assigned an exercise notice), is appropriate for investors who want to accumulate shares at prices below the current market price.


But, it's a bullish strategy and one that has been spectacularly unsuccessful during the October massacre of 2008.

I don't want to recommend adopting the strategy now, but if you are interested in investing some cash in this market (I'm not an investor and will not be selling any naked puts), you have the choice between buying shares and writing those puts.

When markets tumble, there are always some who believe a bottom has been reached.  Most jump in too early, but it's a game that investors play.  Offering no opinion on the merits of investing now, I want to remind readers that the super-high implied volatility that obtains today provides an opportunity to begin putting some money to work in this market, assuming you are not already over-invested.  Thus, if you are eager to get long in this market, selling put options is a strategy worth considering. 

Profits are limited, so if the market eventually soars, you may be unsatisfied with your limited profits.  The premium collected when writing those puts offers some protection to the downside, but is it enough protection in very volatile markets?  That's the decision that must be made by each investor/trader.  Be certain that you remain within your comfort zone if you decide to nibble.

Less Risky Alternative

If you are not interested in stock ownership, then the alternative bullish strategy is to sell put credit spreads.  Less reward, but definitely less risk.  But, it's still a strategy for bullish investors only, and that includes bottom fishers.


Comments are closed.