Big Fat Greek Opportunities

The Greek’s have voted “No”. They also have No money and No power and No way do they tell the EU what to do. It’s a desperate last-ditch tactic by Greek politicians who must find a way to gain some control over what the other Europeans will eventually force them to do. Will it succeed and get them better terms? We have no way to predict that. Ignore every prediction that you hear, and soldier on.

Our goal is to work every day to increase income while reducing risk. As option sellers, we make MORE money when volatility rises, but there are some short term effects that must be addressed.

The bulk of our portfolio is options that we have sold, so these are short positions. Your account value is calculated as if you had to buy back all of those positions at the market price right now. As volatility rises, that market price goes up, too. Rising volatility will drive down the value of your entire portfolio, but since you don’t have to close all positions (or usually you don’t have to close any positions) this negative change in valuation can be ignored. You just keep trading your plan with the knowledge that, once volatility falls (which it always does – and usually within days), your account value will improve. IF you have handled the opportunity presented by high volatility, your account will not only quickly recover, but it will recover to new highs as you collect all of that extra time decay premium.

You need to know what would happen in your account if you woke up tomorrow and every short put position had been exercised. You would have purchased many shares of stock as they all were “put” to you and your cash would have been used to buy all of those shares. At that point, would you have spent all of your cash and would you have been forced to borrow on margin? If your calculation shows that you do not have enough available cash to buy every share that is “put to you”, then you are over-extended. This can happen during market downturns as you take advantage of opportunities to sell new naked put positions.

The point is that you absolutely must know how you would stand in a worst case scenario and then protect yourself from ever getting there. You do not want to ever run out of margin and find yourself in a forced-selling position. In order to control your risk you must put a number on it.

Be disciplined, know your risk, protect from the worst case, and keep on trading for income. We only trade to create income – this is not a casino.