Is It Deja Vu All Over Again, circa 1982?

I published the following on Feb 3, 2009.  I'm re-posting the very slightly modified version because I find myself in the same uncomfortable situation.

I cannot believe the market has seen the lows and that it's going to move much higher from these levels.  Why is that?  As bad as things look, there is the possibility that the worst is over and that the recession will come to an end soon.  There is the possibility that this is still a once-in-a-lifetime buying opportunity.  But I still cannot believe it. And I suppose that disbelief, all by itself, is a contrary indicator.

If anyone out there is thinking as I am right now, the following is posted as a warning as to what can occur.

***

I remember
the summer of 1982 very well.  The market had been heading lower and
the DJIA was about 800, or one tenth of its current value.  One
blowhard, but very influential, market prognosticator (Joe Granville)
was predicting the markets would move still lower.  And I bought into
that.

As
a CBOE market maker I carried large positions that were short many delta (and gamma).  I
traded primarily Hewlett Packard and Dupont.  I planned to make a
killing on the continuing decline.  1981 had been a fantastic year for
me, and I was going to make even more money in 1982.

Then,
a funny (not really funny) thing happened.  The market rose.  And rose
some more.  Being as undisciplined as possible, I remained short –
confident that this newsletter writer had it right and that I was going
to get the rewards I deserved.  And so I did.  The markets moved higher
and higher and, eventually, I had to give it up.  I owned a large short
position at the bottom, made too few adjustments, and paid the price.

Why
mention this story?  Because I feel I'm there again.  Is it really 'deja vu all over again?'  

Yogi

I see no reason
why this market should do anything but recognize that our economy is in
horrible shape; that things are going to get far worse than anyone
believes, and that we may even find ourselves in a depression (update: I no longer believe it can get this bad). Under
those conditions, the stock market should get crushed.

But,
I also know I have a very poor track record when predicting market
direction.  And I'm much more disciplined today.  Thus, I can ignore my
bearishness and avoid placing myself in jeopardy in case the market
bottom is already in place.  What I know for certain is that I have no
idea what the future holds.  I fear a debacle, but cannot afford to bet
on it.   Nor can I allow myself to get clobbered if it comes to pass. 

Thus,
I'm really in a good place – not exposed to a large loss if we see a
dramatic rally and not exposed to a big loss if we find ourselves in
the midst of a stock market catastrophe.  In fact, I own enough positive gamma to profit from a huge move in either direction.   And if neither occurs – if it
turns out that we are range bound for awhile, my iron condor positions will provide a small reward.

If
I'm in such a good place (for now), why does that make me
uncomfortable?  Common sense and a disciplined approach to trading is
supposed to be a good thing.  I know it's a good thing.

Dr. Brett, where are you?

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4 Responses to Is It Deja Vu All Over Again, circa 1982?

  1. Mark,
    You feel uncomfortable because you are a living breathing human with emotions, it’s not uncommon to have re-occuring feelings from past events that maybe resolved or unresolved. We carry with us our emotional baggagge everywhere we go & in everything we do, trading is no exception. If you were bitten by a dog when you were young, it would make sense that you would fear dogs. You can try & rationalize this behavoiur and tell yourself it’s in the past & it won’t happen again or you won’t let it happen again but that does’nt mean you can just forget about it.

  2. Mark Wolfinger 06/01/2009 at 7:40 AM #

    Thanks.
    You are right. I’m unable to forget about it.

  3. Mike S. 06/01/2009 at 9:36 PM #

    Hi Mark, thanks for revealing your thoughts. Nevertheless, I’m looking for some feedback on a trade I made, I mentioned it to a friend of mine who looked at it, liked it, called his broker who told him there was a name for this type of trade but he doesn’t remember what the broker called it.
    Stock SVNT, current price $6.78,
    Sell the $5 calls for $2.80
    Sell the $5 puts for $1.15.
    The way I view this trade: if the stock stays above $5, I receive $2.17 profit per share because the calls get exercised, the puts expire.
    If the stock falls below $5, then the calls are worthless, and I have to buy the stock at $5, but the previous trade was bought at $2.83 ($6.78-$2.80-$1.15). Seems like a bargain..
    Am I missing something and do you know what this is called?
    Thanks again.

  4. Mark Wolfinger 06/01/2009 at 9:53 PM #

    You SOLD A STRADDLE, or you sold a ‘naked straddle.’ I must say that nomencalture is not important, but a naked straddle is a very comon strategy – and is not allowed my most brokers – and if you don’t know what a straddle is, I’d like to suggest that you not make trades such as this without a better understanding of how they work.
    Yes, you are missing something.
    You sold the straddle and collected $3.95. The fact that the stock was trading at $6.78, or any other price is irrelevant – unless you also bought stock (which you neglected to mention).
    If the stock is below $5 at expiration, you buy shares at $5, but can deduct the $395 you already collected. Thus, your purchase price is $1.05 per share.
    But, if the stock is above $5 at expiration, you will have to sell shares at $5.00. You collected $3.95, and your net sale price is $8.95.
    Because you don’t own any shares (again, unless you neglected to mention this very important part of the trade), if the stock is above $8.95, you not only have no profit, you have a loss.
    But let’s assume that you did indeed neglect to mention that you bought stock. That makes the trade a ‘covered straddle.’
    If the stock is above $5, you sell your stock and collect $5. Add to that the $3.95 you collected earlier. Your profit is then $8.95 less $6.78. And yes, that’s $2.17 per share.
    Sounds good to me. Is this stock heading for bankruptcy?