Betting on the market to fall can be a profitable venture, but it is not something that you brag about at the neighborhood barbecue, or preach on twitter...unless of course you wish to lose followers or plan to make new friends to grill burgers with. You see, most folks want to see the market go up, whether through their 401k or their investment advisor. When employees go allocate their 401k funds, there is not an option for a 'short the freaking market fund'. It's all, 'long this' and 'long that'.
It's times like these where some folks do not like my tweets, or posts on Stocktwits. I have not put on my bear suit, but I have been playing for downside for the past few weeks. The U.S. economy will not be in a recession anytime soon, but there are other factors out there weighing on equity prices, and I sure as heck will be taking advantage of downside when it happens.
No one wants to see the market sell-off - it's akin to watching your kid fall off their bike and scrape their legs. It hurts both of you when it happens, but your both better off for it in the long run when your child overcomes it and gets back up in that seat.
These past few weeks have been a challenging environment... especially for an option trader like me who thrives on 500-1000%+ gains on any given trade. With premiums elevated due to the VIX being over 20-25, it has been very hard to wrap my head around many trades on a risk vs. reward basis. For example:
On Wednesday, March 4th, 2015 Priceline ($PCLN) closed at $1225.67. The Weekly $1240 calls closed $3.40 by $3.80 or $3.60 at the midpoint. The VIX at the time was 14.23. Five months later on Wednesday, August 26th, 2015 Priceline ($PCLN) closed at $1223.46($2 lower). Yet the Weekly $1240 calls closed at $6.40 x $7.20, or $6.80 at the midpoint. The VIX at the time was 30.32.
Moral of the story: August option traders are paying nearly 100% more to take on the same risk they would have taken on in March. Worse yet, any market melt up would cause the VIX to likely fall, further deteriorating the call premiums. Meaning even if Priceline ($PCLN) headed towards $1240, you may still lose money on the call as the VIX declined. These are not the type of scenarios that get me excited trading options.
The good thing is, playing for downside can still offer a nice risk vs. reward, as Put buyers get the double whammy... higher option prices as prices decline, and higher premiums as the VIX goes up during the decline - hence, one of the reasons i have been skewed more for downside these past few weeks.
Anyone trading in 2008 can attest to the fact that fortunes made playing downside happened in a day or two... timing is one of the key elements to any trade - I don't pretend to know when the market may sell-off again in 2015, but I sure as heck will be holding some puts when it does.
I have not put my BEAR suit on .. at least not yet.. hope that makes sense and happy trading!