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Options Theory: Don’t Confuse Brains with a Bull Market

January 7, 2021

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Bull markets are great if you participate. They say everyone makes money in a bull market. Apparently, it doesn’t even take brains. But let’s not be too hasty in dismissing those that have scored profits lately. It does take some effort, brains even.

In fact, the older I get, the less I think I agree with the statement I used as this blog’s title. Maybe you don’t have to be a genius to profit from rising equity values, but you do have to do something. I know plenty of people who haven’t made a dime from the stock market. It takes guts to open a brokerage account and risk your hard-earned money. And then, it takes patience to let the seeds you planted come to fruition. Big money is made in bull markets by staying put, not hopping around like a jackrabbit. Once I stumbled upon this truth, I dedicated a portion of my portfolio to forever positions.

The great Jesse Livermore whose investing adventures are outlined in the famous book, Reminiscences of a Stock Operator, said,

“It was never my thinking that made the big money for me, it always was sitting.”

Musings of a master trader

The sitting, more than anything, is what makes you money in a bull market. Maximizing gains is easy in theory. But in practice? Not so much. It requires conviction, patience (there’s that word again), and keeping the end game in mind. Get too caught up in the day to day market machinations, and you’re sunk.

I’ve learned (and relearned) a few best practices on how to best maximize gains.

The Stock Collector

For stock investments, well, have some. Forever positions, I call them. Consider yourself an accumulator. As one born and bred in the short-term world of options contracts, I must say my favorite part of stocks is that they last forever. Long stock is like a call option without an expiration date. It has an unlimited reward. But it’s better because you don’t have to pay for extrinsic value, nor do you suffer any time decay. In fact, not only does the passage of time not hurt, it helps. The longer I own the S&P 500, the more dividends I get paid. That means my cost basis automatically goes down over time.

And if prices move adversely, you can always wait for time to bail you out. At least if you have a diversified portfolio. Do you know how comforting it was in March when my long-term stock positions fell 30% to 40%, and I knew all I needed to do to recoup the loss was give it time?

Patience, dear reader, is the key.

What of maximizing gains with options?

Options – Milk it or Miss Out

Naked Puts: I’ve rolled up and out frequently over the past two months. If you don’t, you run out of exposure, and the market continues climbing without you.

Covered Calls: Roll up the strike and/or roll out in time to re-open the upside profit potential on the stock. I’ve had to do this so many times over the past three months that it’s ridiculous.

Iron Condors: Bear calls have been a widow maker if you’ve let them run unchecked. I’ve carried RUT condors this entire time. The last few have been stopped out. And yet, my account grew regardless. Why? Because I’ve never allowed my portfolio delta to turn negative. As outlined in October’s edition of the Trading Justice newsletter, I never let my beta weighted portfolio delta turn negative when we’re in an uptrend.

Once upon a time, I probably would have lived or died by the RUT condor. It dominated my portfolio. Fortunately, I wised up and stopped giving so much power to a single system. After adjusting my sizing and paying more attention to my overall portfolio exposure, I’ve been much more in harmony with the market trend.

And in times like these when the trend keeps going and going and going, the only way to keep your sanity and capital intact is to play along.

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2 Replies to “Options Theory: Don’t Confuse Brains with a Bull Market”

  1. Avatar Fuad says:

    Thanks Tyler.
    Charlie Munger said, “You don’t make money when you buy and you don’t make money when you sell. You make money when you wait.”

  2. Avatar MichaelProkop says:

    Ah yes, THE patience!
    Thanks for your reassurance Tyler!

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