What Other Bloggers Are Saying

Good advice from SMB Remote Trading: (Thanks Dr. Brett for the link)

"Most new traders focus on making money.  All good,
experienced, profitable traders focus on not losing money and just
letting the gains materialize.  Defense first…

Move on.  The act of taking your loss often frees
the trader to make another good trade.  When they are still in this
losing position they are paralyzed…  They are consumed
with this loss and unable to place a new, good trade.  But when you hit
the bids and just accept your loss, a burden is lifted from your
shoulders and you can go back to work."

Remember my four rules that should be followed in this sequence:

  1. Don't go broke
  2. Make money
  3. Build wealth
  4. Never, never forget rule #1

Then there's this more upbeat piece from Felix Salmon:

"But there is a tiny bit of good news: for the first time in many years
I'm finally beginning to think that stocks aren't overpriced any more.
(Although they're still overpriced in relation to the credit market,
which is priced for Armageddon.) As Dean Baker points out, a low stock
market is a gift to young workers.
If we're saddling them with hundreds of billions of dollars in new
liabilities, maybe it's just as well we're gifting them $10 trillion in
upside [potential] on equities at the same time."

What's behind the market debacle?  Don Fishback, quoting Larry McMillan:

"The selling has reached historic proportions. There literally is a
“run on the market,” as investors worldwide are dumping stocks. It
seems that the major catalyst for this selling is the fact that the
newest large banks primarily J. P. Morgan, Goldman Sachs, and possibly
Morgan Stanley as well — have issued massive margin calls to hedge
funds and other professional traders… These calls were not issued because of market losses, but
more because the banks arbitrarily decided that they wanted their
customers to use less leverage. Margin rates as low as 15% for broker
dealers were raised to 35%; hedge funds who had been used to operating
on high leverage were told that they had to bring accounts up to a much
larger percentage of equity. In this illiquid environment, where all
manor of exotic securities literally have no bids, the only place to
raise the cash to meet margin calls was to sell stock. That is what
really set this market over the edge."

Have covered call positions?  Tempted to sell extra calls , assuming your broker allows it (many don't)?  Here's excellent advice from Adam at Daily Options Report:

"What is a horrible idea though is over-writing fat calls against a
stock position you've ridden down, or are riding down, or just own and
are getting ill with. The relatively small money you take in vs. the
stock will barely ease the bleeding, and will only annoy you to no end
if/when it ever turns."


2 Responses to What Other Bloggers Are Saying

  1. TR 10/11/2008 at 3:48 AM #

    Hi Mark
    Thanks for the interesting post with some very good insights. I was intrigued by the Adam’s comments about covered call writing. I never have nor plan to ever OVER-WRITE covered calls but nonetheless the post somewhat strikes a chord with something I have been thinking about…
    I have been writing covered calls on my portfolio of 5 ETF’s that I own for about 8 months now. Historically I was a buy and hold investor with index funds, and after reading your books I switched to ETF’s and started writing one month OTM calls targeting a premium of 0.5% with a delta of 20 (usually this ends up around 5% OTM). So far I have been happy with the results of my coverd call writing approach because my goal is to beat buy and hold with CCW. I have a long term investment horizon of 20+ years (with a goal of maximizing long term returns)so while the current drop is painful, it is not keeping me awake at night.
    Given the market situation, I have been thinking I should take a break from covered call writing for the month of November. The reason I am thinking this is that if there is a major rally in the market I really don’t want my gains to be cut. I realise that this is a bullish view (and I philosophically don’t want to predict market direection). That being said I am thinking that if I beleive the market is going to make a major move (up or down)in the next 5 weeks, then writing covered calls may not be a good choice for me right now. If market drops 10 or 20% the 0.5% premium will be small consolation and if the market rises 10 or 15% I will be missing out on the upside.
    What are your thoughts on this? Does this make sense to you?

  2. Mark 10/11/2008 at 1:23 PM #

    Your view is consistently bullish. Writing options with a delta of 20 gives you plenty of upside potential with little downside protection.
    That’s what suits you and your investment objectives.
    If you decide to forgo collecting that November premium in an attempt to generate a huge upside, there’s nothing ‘right’ nor ‘wrong’ with that decision. It’s your money and it’s a reasonable choice.
    I only ask you to consider this: If the market falls further (that’s a question, not a prediction), are you ever going to write covered calls again?
    What I like about your question is that you are not locked into a specific strategy with rigid rules. You are flexible, and that’s a good thing.