Too bad we didn’t follow our own advice, since it would have given the theoretical gain we achieved a nice boost. Although we’d correctly predicted a 96.13 low in the Diamonds that came within 0.04 points of nailing Monday night’s key bottom, we let our bearish position ride. Dumb. Any time an option trader fails to adjust a put position after three consecutive profitable days, he is just being greedy. Statistically speaking, a three-day selloff is probably as good as it will ever get – a fact that held true even in the case of the October 1987 Crash. It may have seemed as though the world was ending at the time, but in actuality, anyone who bought puts on Friday, October 16, when stocks began to plunge, had to be out of them by Tuesday morning, October 20, to avoid one of the nastiest whiplash rallies in stock-market history.

97% Losers

Naked put buyers have probably lost money 97% of the time since options were first listed in 1973, but it is still possible to beat the odds.  We attempted to do so by exiting July 96 Diamond puts near yesterday’s opening, realizing a theoretical gain on each put of 27 cents just before they plummeted toward zero. Applying the paper gain to some August 98 puts that we still hold, and to a few more that we acquired yesterday for an average 2.65, gave us an adjusted theoretical cost basis of 2.13.  It helped that we waited for a 270-point rally to unfold before adding to our put position.  The decision to do so was based on the very bullish projection that went out Tuesday night for the E-Mini S&Ps.  We were expecting a monster rally to 1049.25: “…there are obviously more than a few panicky shorts still alive. They’ll get what they deserve…if the futures push above 1027.50 [on Wednesday. More bullish still would be a move above 1031.50, the midpoint resistance of the pattern begun from yesterday’s low. It projects as high as 1049.25.”

In the actual event, the futures rallied yesterday to 1059.50.  As the above chart shows, they could go for another 10 (or so) points on Thursday before running into serious resistance. With any luck, we’ll still have a little dry powder left to buy some more put options when the rally finally tops out.

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts.  Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2010, Rick Ackerman. All Rights Reserved. www.rickackerman.com

-- Posted Thursday, 8 July 2010 | Digg This Article