As many of you have inquired over the past few weeks regarding our strategy. I wanted to share with you a question that we received this morning that reflects many of the inquiries over the past few weeks regarding why we have not suggested bearish trades in this “bearish” market.
The market is down about 15% from its peak, which puts it squarely in correction territory, but certainly not in a bearish market yet. The average 15% correction is most frequently followed by 3 months of fairly bullish price action. Statistics clearly show that when we have violent moves to the downside, they are most frequently followed by quick bounces back higher. It is natural as humans to have seemingly blocked out the fact that if we had sold call credit spreads on every sell-off over the last 10 years, we would have lost money hand over fist. Selling calls spreads during this recent selloff would have been profitable, but that strategy, in the long run, has continued to show negative returns. Over the past 10 years we can count on 1 hand the # of times the market has corrected for more than just a few weeks, but dozens of times when the market bounced back higher. The statistics are clearly stacked against us for selling call credit spreads in general, especially near relative lows. We can certainly debate as to whether this a “normal” correction or it this is part of a larger shift in market sentiment, however, we want to see a 20% correction from the peaks to confirm that view. I will admit that we are inching closer to that level each day, but not quite there yet.
In defense of our strategy, Bullish put spreads are most profitable when volatility is high and markets are near relative lows. Our credit spread income strategies are based on probabilities and statistics, not where we feel the markets are heading. While we admit that this market has been more bearish than our fundamental factors suggest and has created a drag on our portfolios, it’s always easy to say we should have taken bearish trades during these quick market sell-offs and forget that in the long run, these types of sell-offs is an exception, not the rule.
I encourage you to share your thoughts and comments to our reply and please let me know if you have any further questions. Send them to us at [email protected]
I want to wish everyone a wonderful holiday and a prosperous new year with your families! We thank you for your support of our platform and services in 2018 and look forward to continuing into 2019!