I am very impressed that everyone kept their composure this week. We've witnessed a lot this past week and if you look around, you'll notice...you made it!

If you are following the core principles that I try to teach you'll notice that you are doing just fine. Sure money might have been lost yesterday, but I got 100 e-mails from people yesterday that claimed it either "wasn't bad" or "I made money!"

The biggest thing on everyone's mind is "What do I do now?" Is this a big enough event to change strategy, do I ditch positions to start others or should I close up shop all together? I will tell you that me or my strategies don't change and I don't feel you or your strategies should change either. "I think you should stay the same wonderful person you are today."

However, I have one exception. I mentioned this on the Marketcast last night, but take a look at the VIX.


If you have followed my blog for longer than 6 months, you'll notice I only bring up the VIX under rare circumstances. This is one of them. With volatility being a measurement of risk, you can see that risk is priced a lot higher than it has been in months. The question is how does this effect an option addict?

It makes buying options less desirable, and selling options more desirable. The only time I ever get involved in options selling is at these times when it actually makes sense. When I am getting paid excess premium to do so. However, I don't want anyone to think I am selling out here. I still analyze every chart and every trade the same way. My preferred strategy stays the same, however during these times inflated premiums are going to have a negative impact on the risk/reward ratio for an option buyer. I do think it makes sense to diversify a little by perhaps selling a few options to offset having a HUGE delta position in a market that is likely to be directionless for a little while.

Final thoughts... can we say for sure that the market is changing? There are a few warning signs that have been discussed, but you can never be 100% sure of what will happen tomorrow. As the professionals always say, they are less interested in predicting, but more interested in reacting. I mentioned that emotion is likely to surface here with the market gyrations, so make sure you scale back your position size to protect yourself. I scaled out of a few winners yesterday to lock in some gains, and I feel fine about it. I love to add to winners and scale out of losers. I don't want to have a lot on the table when I can sense the environment is changing.

Continue to look for the best trends, the best breakouts, and the best trades available. Don't feel compelled to trade, but keep your eye out for the next compelling trade. Trade small, and add if you are right. Shorten your time horizons perhaps? Trading trends might be tough here going forward, so perhaps shorten your sights to the smaller movements within the trends.

For the trades you have going, keep them! The chart is the chart, and if that chart doesn't provide your signal, don't exit. Protect your profits with stops and be extremely sensitive to your environment. Make sure you are diversified and KEEP A POSITIVE ATTITUDE. As soon as you start to feel sorry for yourself, doubt your abilities, or start to second guess your goals and aspirations, you will self destruct.

This is just another hurdle in a life long race. Keep your head up.

Posted by Option Addict on 6/08/2007 at 10:08 AM | Permalink