Happy option expiration day.
Longtime readers know I’m not a fan of establishing new trades on a Friday, right in front of a weekend.
I’m even less a fan of trading on option expiration day. The potential for “funny business” is too great.
So, instead of writing about the technical condition of the stock market today, let’s open up the mailbag and see what sort of comments were inspired by this week’s volatility.
But first… a little background…
Back on February 15, I hosted a special webinar that coincided with the launch of my Delta Report trading service. During the webinar, I explained the three conditions I thought would lead to a significant stock market decline later this year.
It seemed like a crazy idea at the time. The stock market was in full “Trump rally” mode and the S&P 500 made a new all-time high above 2350 that very day.
During the webinar, I stated several times that it was too early to be shorting stocks. We didn’t have all three conditions in place yet, the market was in a seasonally strong period, and stock prices were likely headed even higher. But I did say I expected the S&P 500 would make a significant, intermediate-term high on or around May 12.
The S&P closed at its highest point of the year so far on May 15 – just one trading day later than my prediction.
For most of the past week, I’ve advised traders to be cautious. We’re entering a seasonally weak period for stocks. The risk of a sharp decline seemed larger than what was priced in by a Volatility Index (VIX) trading near 10. And VIX option prices were signaling caution.
I told you to tighten your stops, trim some profits, and be very selective when taking new long positions.
I DID NOT recommend getting aggressive with short trades, though. We did not have the sort of “extremely overbought” conditions that set up good risk/reward trades from the short side.
Now, following Wednesday’s big swoon lower, I have received lots of flattering feedback from folks who took my suggestions and avoided getting hit by the downdraft of a 43-point decline in the S&P 500.
Thank you for your notes. It’s nice to be appreciated. It motivates me to continue to work hard and share my trading thoughts with you. And it helps me convince Mom that I actually do have a real job.
It is far more instructive, however, to look at the unflattering comments. They offer a better chance for education.
For example, here’s one from a disappointed subscriber who has followed me for several years:
Went back last 3 years and in almost each case even though U were bearish we have NEVER been fully prepared for these big down draft days, by having decent SHORT positions. I do not remember when U have given us an INDEX put position that we could take advantage of that was correct. You always mention that you are always early with these types of trades. Damn wish U were early in the last 3-4 days as we all know the upside was very LIMITED.
You made your reputation by calling the 2007-9 catastrophe correctly. Well where has that instinct gone the last 3-4 years? Again you have been mostly bearish for a while and told all of us to sell most long positions and horde cash recently while prepping for a pretty “large” and protracted correction. Good advice but it did NOT go far enough period. There may be more opportunities with a longer correction after big bounce backs but what happened yesterday we cannot get back the opportunity costs. There was 15-20 pure POINTS in various put options that are gone forever. So we truly were NOT prepared once again by following your advice as it did not go far enough.
C'mon MAN, just call em like I see them.
And then there was this one from another… no, wait… it’s a second email from the same guy…
We have been waiting as U have for this opportunity for a long time and now we missed 40 handles on the S&P and more on the QQQs. I know U cannot be happy with that either. U have heard this from me for many years …….the market from a TA basis generally does NOT set up perfect for short trades. We may have some opportunities if we get a bounce back rally but the premiums on short positions has just gone up BIG. Not what we wanted.
Today if set up properly was a HOME RUN and we swung and missed because the set up was not “PERFECT” All the signs were there…..Damn…..
Am sure I am not the only subscriber that has these feelings of missing out and U will hear about it from them as well.
Not trying to be difficult but these opportunities just do not happen and have NOT happened for a long time. Selling uncovered puts for 50 cents does not get it when we miss the bigger trades. U have even said that these tight ranges are very difficult to find trades. Well look what we missed.
– Jeff W.
This subscriber is wrong.
I haven’t been bearish for the last 3-4 years. I’ve been bearish for 30 years. That’s just how I lean. That’s my personal bias.
But I don’t trade off my personal bias. Folks who trade that way have a very short trading life. Heck, if I had advised you to buy put options every time I felt bearish over the past 3-4 years, you’d be flat broke by now.
Even over the past three months there have been many mildly overbought situations, and there have been numerous reasons to be cautious, or even bearish. You would have lost money buying put options in just about all of those situations.
My primary trading strategy is simple… I wait for the market to reach extreme conditions – either overbought or oversold, where the proverbial rubber band is about as stretched as possible. Then I bet on the rubber band snapping back.
That doesn’t mean I turn a blind eye when conditions are not “extreme.” I’m just not willing to commit my own money to lower-probability trades. I don’t mind sitting on the sidelines, holding cash, and waiting for a perfect or nearly perfect trade setup.
Clearly, Jeff, you are a more aggressive trader than I am. As such, you can take the information I provide and then use your God-given free will to make your own trades.
But I’m not ever going to recommend a trade to several thousand subscribers that I wouldn’t be willing to make myself.
You are correct that I made a good reputation for myself trading the 2007-2009 financial crisis. 2008 was the most profitable year I’ve ever had. But, you should know… most of the money I made, and most of the trades I recommended to subscribers in 2008, were LONG positions.
Yes, I had a handful of short trades that performed quite well during the financial crisis. But the big money, the strategy that contributed the most to a better-than-1,000% year, was betting on the long side.
You see, in 2008 there were multiple times when the stock market stretched into extremely oversold conditions. The best, lowest-risk trades at that time came from betting that the rubber band would snap back. Oversold stocks would rally to neutral levels. And we made a bunch of money every time that happened.
I suspect that when the next financial crisis hits – maybe later this year – we’ll likely have more chances to profit on the long side than on the short side, just like in 2008.
So… be prepared for that quirky situation later this year.
Finally, I’d be remiss if I didn’t address the baseball analogy. Thank you for that. Baseball is a HUGE deal in the Clark household. And I appreciate any chance I get to put my trading strategy into baseball terms…
It’s not that I swung and missed. I was “taking” the pitch all the way. I had no intention of swinging.
I was waiting for the fat pitch – the high-hanging curveball that doesn’t break and just floats right across the middle of the plate. That’s not what I got.
I got a wicked slider that broke down and hard over the outside corner.
Now… if I was sitting on a two-strike count with two outs in the bottom of the ninth inning, I’d swing at that pitch just to stay alive and keep the game going.
But here’s what separates the stock market from baseball… In the stock market, you only strike out when you run out of money.
If you swing at every pitch that might possibly be called a strike, you’ll be sent back to the minor leagues and spend your days cleaning out lockers and washing jockstraps for players with far less talent.
On the other hand, if you just wait patiently for the fat pitch, the one that you can easily send into the bleacher seats, then you’ll have a tremendous, long-term career trading the stock market.
I don’t mind at all about missing out on the chance to profit on a 43-point decline in the S&P 500. I’d be quite upset, though, if I was fully invested in that situation.
The stock market is a baseball game that never ends – unless you run out of money. If you miss the chance to profit on one trade today, heck, there’s another trade that will come along tomorrow. There’s no need to swing at every pitch that looks like a strike.
I prefer to wait for the fat pitch, and then put it over the fence.
I’ve been playing this game for more than three decades. I’ve let a lot of strikes go by without swinging at them. But not swinging has never cost me a dime.
Swinging at bad pitches, or pitches that were less than perfect, oftentimes gets expensive.
I hope you see my point here. I understand your disappointment that we weren’t fully loaded on the short side ahead of Wednesday’s decline. But if you think you’ll never get that chance again, well… you’re wrong.
The longer you stand at the plate, the more pitches you take, the better the chance you’ll get something you like.
Best regards and good trading,
P.S. I love getting feedback from my readers – both good and bad. Don’t hesitate to send your questions, comments, and trading stories to me right here.