Option Strategy Workshop: Rolling Contracts

  OptionSage submits:   “ Markets can remain irrational longer than you can remain solvent ” - John Maynard Keynes Much like Newton was inspired to understand gravity as the Apple fell on his head (or maybe not according to this article !)   so too Phil was inspired by nature in his profound work which I affectionately label “ Phil’s Market Wave Theory ”.   With this week’s move in the markets, it seems a particularly appropriate time to recall that theory!   Many people stake out spots near the water but, as the day goes on, the tide gets higher and the people move to higher ground.  Some people go much higher and some people move just a little but there’s a certain point where the water crests up onto the beach and sends everyone scurrying for higher ground in a mad dash. Then it goes the other way! Just when it seems that the water is going to go higher than it ever went before ( and, thanks to global warming it does!) and just when you start to think the next wave will wash over the top and soak everyone, it suddenly stops and an hour later you can’t believe you ever thought the water would get that high as it seems so impossible as you watch it pull away from the beach, exposing sand that hadn’t been seen since the morning . “The markets are like that.  Frothy highs and " impossible " lows and lots of investors scurrying back an forth trying to guess where the next wave will stop (day traders) while others stake out medium-term positions (deck chair people) and still others make substantial long-term plays (beach house owners) and are willing to ride out even the harshest storms.  While I have fun playing in the waves I guess I have to think of myself as a shell collector, looking for the opportunities that are uncovered once all the excitement dies down.  Let the other people get soaked trying to guess the waves - we can do very well renting deck chairs in any market! =========================================================== In the stock market, renting deck chairs is akin to selling options (in this case call options).   Always a buyer is on the prowl for the next great deal (the long call purchaser) and we can happily settle on terms (strike price and timeframe), content in knowing that nobody can take the premium we receive away from us (upon assignment or at expiration, we realize our gains).   Only if we buy…