The Bulls vs. The Bears

I'm writing from the Chicago area, but the headline of this post does not refer to the city's sports teams.

Retail sales were pretty bad over the holiday shopping period.  That does not bode well for the stock market. 

But, David points out that "the individual investor bullishness level was reported at 28.95%. This is down from 39.73% last week."  That's a steep decline and should be encouraging news to bullish contrarians.

And, Barry asks: "Here’s an interesting question: Are videos like this one more likely to occur nearer to tops or bottoms?"  He obviously suggests that we are late in the bear-market cycle.

I admit that I have no idea as to what's coming next.  After the fact, it will be pretty easy to look back and say that it was 'obvious' that the market was poised to …

The difficulty is that we must make our decisions before the future is known. 

  • Is it time to protect your assets by using bearish option strategies?
  • Or is it time to buy the 'bargains' and get long?
  • Or it it time to prepare for a multi-year sideways stock market by writing option premium?

Surely one of those methods is going to pay handsome rewards.  But which?

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6 Responses to The Bulls vs. The Bears

  1. DP 12/26/2008 at 10:30 AM #

    No idea which is the “best” approach, the volatility has died down for a while so those strangles I was having fun with are no longer, well, fun 🙂
    Personally I think I’m looking at waiting until we see a little more volatility early Jan then going buy-write on stocks I would normally consider for buy and hold long term, but will never be more than 50% invested until things change.
    Make a list of stocks you’d like to buy then wait. Forced selling isn’t done yet. What’s the best way to make someone want their money right now who was otherwise content to let it ride? Tell them they can’t have it. The minute these hedge funds that closed the doors start to allow redemptions again, they’ll find the 40% they were hoping to avoid suddenly became 80%.
    It’s a classic run on the bank – fear that your money might not be available when you need it means you take it out while you can, whether you need it right now or not. No evidence for this, but I suspect that every time another hedge fund announces they are not allowing redemptions, a bunch of other hedge funds get hit by withdrawals from customers taking their money out while they can.

  2. Mark Wolfinger 12/26/2008 at 10:34 AM #

    DP,
    It may not be as much ‘fun’ because you cannot collect the larger premiums you were receiving earlier, but to me, it’s even more fun to watch the premiums erode so that I can profit from my current positions. We cannot have fun at both ends of the spectrum simultaneously.

  3. rluser 12/27/2008 at 12:05 AM #

    I personally cast a vote for premium writing. It’s still easy to find really solid companies where the premium is worth in excess of 35% annualized. That may not be as much ‘fun’ as last month, but it’s still a lot of ‘fun.’ Of course, on can end up with capital tied up in the company and then watch premium fall (not to mention the underlying). With my buy and hold mentality (feeling I can outwait downturns), this does not strike me as a terrible outcome by any means.

  4. Mark Wolfinger 12/27/2008 at 11:44 AM #

    And that’s what makes options so versatile. Writing covered calls appeals to you – and I like the way you use them. Others adopt different strategies.
    Thanks for the comment.

  5. Erin 12/28/2008 at 7:44 PM #

    Hello Mark, I just finished reading your rookies book (which I would highly recommend to anyone btw) and had a question. I’m looking at SPY iron condors right now but because of the skew, the call spread is contributing so little credit (e.g. a 7 delta put spread is earning 2x more than the eqv delta call spread) I’m wondering if it is worthwhile writing it at all. I was wondering how you are dealing with this issue in the current environment? Should I stick to writing OTM put bull spreads?

  6. Mark Wolfinger 12/28/2008 at 10:23 PM #

    Erin,
    I cannot give you a good answer because I just don’t think there is one.
    I don’t trade relatively low priced underlyings, such as SPY. I’m currently trading only RUT options. But, if I were interested in SPY, I would be looking at SPX options instead. The bid/ask spreads are much wider and it’s sometimes difficult to trade, but the options are liquid. If you do try this – please do not leg into spreads. that’s far too risky.
    I understand the advantages of SPY and am not suggesting SPX. But, that’s one way to eliminate very low-priced options.
    Consider alternatives – I don’t see anything to be gained by selling options or option spreads for peanuts.
    Perhaps you could sell a smaller number of call spreads, but move the strike prices up one or two points. The major problem with that is you may not feel comfortable selling options so close to being in the money. But is is an alternative.
    I would NOT stick with selling only put spreads, unless you are truly bullish. If neutral in your outlook, and especially if you are bearish, you cannot afford to sell only puts.
    The best alternative may be to find a more volatile underlying to trade. That would give you better spread prices, but high volatility is the enemy of an iron condor trader.
    There is no clear choice here. I would definitely not be selling spreads for a dime. That’s not likely to work well over the longer-term. I guess the major question for you is: are you that comfortable with SPY options that you don’t have other choices?
    One more point: The current environment is much more volatile than we have seen in a long time. It’s just so much less volatile than Oct and Nov that is just ‘feels’ like a dull, non-volatile market. It was not so long ago that the CBOE volatility index, VIX, was trading near 20 – and so long beofre that that it was near 10. If you think option premium is low now, you should have seen it then.
    If you believe IV is especially low right now (and I am NOT suggesting that it is) you can consider diagonal spreads (Chapter 21). Those perform better when IV increases.
    Don’t force trades. Trust your comfort zone.