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Options Theory: Thoughts About Market Crashes

October 11, 2018

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Yesterday’s sucker punch has left bulls dazed and confused. Is this another in a long line of market corrections that will eventually give way to new highs? Or, is it the beginning of the end to our long-lasting bull market?

Unfortunately, nobody knows. Insert unsatisfying quip such as “time will tell” here.

I want to provide some context and insights (hopefully helpful) for today’s post. These are in no particular order.

I hate you, Mr. Market. You broke my heart with such a cold, heartless dive. My net worth is now 1% less than it was a week ago and I demand reparations. Oh great, now it’s 1.2%. As Uncle Owen once grumbled,

“There’ll be hell to pay!”

With that out of the way…

The first bounce after a crash like this is almost always a fade. That means it gets stuffed into oblivion Dikembe Mutombo style. So consider the eventual snap-back a bear retracement pattern that will create tasty morsels for short sellers. Let us hope we get a multi-day pop, not some one-day wonder.

This morning’s price action was pathetic. The worst thing bulls could have hoped for was a slow grind lower. Either rip the band-aid off or give me my rebound. All this mild meandering isn’t doing anybody any good. I was gunning for a large down-gap and further spikage in the VIX. My request was summarily denied.

What’s that squawking you ask? It’s a barrel full of wounded Condors being taken out and shot behind the shed. Scores of condor caretakers are calling it quits as I type.

… And the market just fell another 0.5%. Maybe we’ll get that puking today after all!

This week’s free fall is a painful reminder to traders of the paramount importance of position sizing and risk management. Suffering a drawdown sub 10% in your trading account is no fun, but survivable. But if through improper sizing and lack of adherence to risk protocols you managed to stumble into a 20+% drawdown – well, the road to recovery is going to be much longer.

Right now I suspect those who stopped out of their bullish trades at the first sign of trouble are sitting back with satisfaction. As well they should! Bailing when you’re down 5% only to see the market swoon to down 10% or 15% is a win, baby.

Let me end on an optimistic tone. This correction will pave the way for a recovery. That’s the way it always works. So, keep your wits about you and develop a plan for taking advantage of the next ascent. As we say in the Bear Market Survival Guide, learn how to sow the seeds for future profits.  They always come, it’s just a matter of whether you’ll be there to collect.

P.S. The VIX finally got a bona fide panic spike and tagged 28.84. We are close, friends. Oh so close.

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1 Reply to “Options Theory: Thoughts About Market Crashes”

  1. Avatar AbidRahnaman says:

    Thank you Tyler good read

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