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Options Theory: Jack B. Nimble

September 10, 2020

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~Jack be nimble, jack be quick, jack jump over the candlestick. ~

One of the underappreciated qualities of a trader is the ability to be nimble. You can be a bear at dawn, but a bull by dusk. You have no shareholders to answer to, no clients to satisfy. It’s your dough and your show. If the market winds shift, so too can you.

I’ve thought about this over the past week. After a long spell in hibernation, the volatility monster has finally returned to ravage the land. Patricians and peasants are puking, and neophytes to the Street are learning that stonks don’t always rise.

The meltup has finally met its match. After months on end where bear trades were the dumbest play on the planet, short delta is finally, finally playing ball. Hooray, I say. Now we have two-sided action. Bears are once again allowed on the playground. I enjoy environments like this in part because it makes us earn our keep. Making money when the market’s rising every day is easy. But, as they say, don’t confuse brains with a bull market.

If you’re going to thrive in our new, higher volatility regime, then you best put on your dance shoes and prepare to be nimble. For my part, I advocate taking partial profits. Use the volatility to your advantage by scaling in and out.

Was Thursday’s rollover the beginning of a second down-leg in the Nasdaq? I dunno. But I rang the register on some bull trades that were sitting well in the profit zone after the bounce. I even tossed on a few bear calls for good measure. I can only hope we keep ricocheting around. Sharp moves in either direction create opportunities for profits on both sides of the aisle.

The key message for today is you must be nimble. Pick your spots, draw your lines in the sand. Plan, plot, and scheme. Be proactive, not reactive.

For example, I had a plan heading into Thursday. On the one hand, I knew that rebounds from oversold conditions are often dead-cat bounces. That means they’re prone to failure, and often result in a lower pivot high forming. As such, I prepped a few adjustments to reduce exposure if we rolled.

On the other hand, the severity of the selloff and extremity of the VIX spike suggested that we may have seen sufficient capitulation to signal the end of the correction. Thus, I didn’t want to flip my entire portfolio bearish due to one down day.

Since the first scenario played out, I dutifully reduced risk. If we rip higher moving forward, I’m watching for a push back above the 20-day moving average and the pivot high just created ($343) to signal Thursday’s drop was a ruse and the uptrend is back on. Alternatively, if we keep selling off, I’ll root for another VIX spike to sell bull puts anew.

$SPY chart - new resistance.

Stay frosty, friends!

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One Reply to “Options Theory: Jack B. Nimble”

  1. Fuad says:

    Gotta love that VIX spike.
    Taking full or partial profits is a lesson I learned from last Thursday drop.
    The 50 MA is holding on the daily chart and the 9 MA is holding on the weekly chart. I hope this means that the support will hold and the bulls will come back next week. If not then will trade small and take profits early.
    Always enjoy these blogs.

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