Some weekend ideas

I thought to post something for the weekend. There are some points making me a bit hesitant to write naked puts at this time. First of all, although the VIX index has dropped since one month ago, and although the media is saying things have stabilized, I think we are still at very scary times. It could be the matter of a few days that everything may become like hell again as we have seen before last year and early this year. The other serious thing for me in this uncertainty is my health. Selling naked puts can really make you sick if you think about it too much. Even if your portfolio is doing good, just the thought that your stock may tank tomorrow may eventually have some serious health consequences. The naked put writing however, can be a good idea on stocks that you want to own and put them in your RRSP or IRA. For that a covered all idea can also work but you have to keep doing it and you should have decent gains for long term.

My point is that when there is uncertainty, you usually "buy" insurance instead of selling it. For some stocks, buying long term options (say Jan 2010 options) is not that risky as things may change 10 times by then. The only point is to choose the stocks that can have big moves.

Example: You want to make a strangle position on AAPL. You don't have to buy the calls and puts all at once! With this volaile market, you most certainly can get a chance to buy the call at a sell off day and buy the puts at a rally day. It is off course an art and I would probably only buy 1 contract at each step. The other point is that the call and put don't have to be expiring the same month. If you have a feeling that AAPL is going to go up in May but may face troubles in July, you can focus on a May call option and a July put option. It is also best to choose the strike prices that you would think will be more possible to happen.

So my advice is now to take it easy and make small moves. Trades like the C option trade I did do happen every once in a while. If you can do one of them in a month, your portfoilo will still grow well. Just remember that buying May options at this time with the fast time decay is not generally recommended unless you have a good reason (for example earning coming, rumor, etc.).

One more thing I remembered if you are new to trading: There is a lot of manipulation going on specially now. Don't get fooled by future values before market open. There are some hedge fund managers who have a lot of money and can manipulate the futures (for example pumping the futures) and then use this opportunity to dump their stocks in early trading and vice versa. If the futures are up or down a bit (say less than 0.5%), it normally doesn't mean anything. However, if there is a big news and futures are up or down by 1-2% it is usually not manipulation. Normally the best time to make a trade is around 3-4pm EST.
One example of premarket manipulation was GDX on Thursday. It was 1% up premarket starting with a big dump at open and ending -5%! This feels like a criminal action but it is the reality. I know some daytraders who use this rule and do the opposite of the premarket or futures and take profits the same day. I do not like daytrading anyway, but these are good to know.

This week, I see two kinds of traders out there: bullish ones waiting for a pull back to load up and bearish ones waiting for a rally to short. It should be quite a battle depending on the news for GM and stress test propaganda!

Anyways, anybody has a bearish idea? I like to buy puts on a stock to be prepared in case market changes trend.