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History repeats itself

I can see it all again and it is amazing and satisfying at the same time. Although, I should feel sorry or sympathy but I do not. Call me cynical or rude, but I actually feel satisfaction.

What am I talking about?

All the fools who last few weeks were boasting about their great success buying put against this market.

For a few years, people were predicting crash. It finally arrived. They started celebrating and posting on Facebook all over the place how right they were. They started buying puts, telling everyone with different opinion what idiots we were not buying puts that making thousands of percent of gains was easy and how come you are losing money, you must be a special kind of idiot then.

And now, we see the market bounce. The same people who were boasting their gains are now losing money. They are denying the market is in bottom, they keep predicting more selling because of the Coronavirus, because of debt, because of economy, because of FED, because of Tuesday…

And they still keep losing money. And they keep buying puts because this bounce must end obviously. They do not question that it may not end. What if this market keeps bouncing around? What if we lose 5% this week and gain 5% next week, or day, or a few days? All their long long puts will lose money.

What is interesting is how backwards their thinking is. Being bearish after 35% market drop is simply wrong. If you are bearish, you have it all backwards. When I told these people that they are on the wrong side of the river, they came up with bazillion of reasons why I am wrong. Bias. They trade their reasons and expectations, not reality. But ask yourself, what risk reward do you have on bearish side and on the bullish side? Is being long better to being short? Or vice-versa? The market dropped 35% with VIX peaked at 85 and now waning away from those highs. Can we go lower from here? Of course we can. And I believe, we may even re-test the previous lows or go below. But we may not. We may just chop around.

Being bearish after 35% drop is wrong in my opinion. The time of the market free fall is over. The Coronavirus panic is also fading away, central banks are now competing with each other who will bring a better stimulus plan to the table, and economy will get hit hard in the upcoming quarter or two. EVERYBODY knows this. The market knows this too and it is all priced in. An example? Look at the job numbers. People were telling all over the Facebook how the markets would tank hard once the bad data come out. The market rallied. Not on data, that was priced in, but on the stimulus. What makes you sure that the market will tank once the quarter earnings come out? If it is all priced in and earnings come out thew market may in fact rally. Not because the data are bad, but not as bad as everyone expected and market was pricing in. I have seen it in the past too. People predicting bad earnings, loading puts, “because it was a sure thing” and then they lost. The earnings was bad, but not as bad.

A time of a free fall when it was easy to load up puts every day and make “millions” is over. Expect a great choppiness now. Expect the market bouncing around. We are now rallying, tomorrow it can all turn around and we may be dropping just to rally again next week. Can you predict with accuracy when this turns around? If so, re-position your trades accordingly, if you cannot predict, it is better to stay out as this unpredictable choppiness will wipe out your account with directional trades. I got tired with all the choppiness.

I got hurt in 2018 Trump’s trade war and I didn’t want to get hurt again this time, so I decided to stay out and did not trade this slump. But once we are this low, I will slowly start adding new trades and trade my way up. Even if it is a choppy up (or some down) as I do not expect daily moves to be more than 5% or 10% as we saw a few weeks ago. I was out and waiting for this craziness to end. Other were trading it by buying puts and considering themselves geniuses. The problem is, it is hard to spot the time when that particular strategy is going to end and it is time to shift the strategy. In euphoria, many keep piling puts because this market (SPX) will go to 1700… or I have even seen a prediction to 700. And spotting reversals is darn hard. So people will keep piling puts until they lose all their accounts which will happen long before they admit that the market bias has changed.

And I start seeing this on Facebook again. These geniuses are now asking questions what to do with their puts now. How to salvage their positions. I have seen one asking if selling a call against his long put would help him. A clear ignorance.

I decided to stay out of the market as far as options go. I traded a few butterflies here and there, made money, but overall, I closed some of the position when the market started tanking (yes I took a loss) and I plan to re-open those positions as soon as this market calms down, but I was not sitting completely aside. I was buying stocks on sale. Thanks to zero commissions trading I could be adding few shares here and there of companies I liked. I was adding SPY, MSFT, CVX, CLX, GAIN, PPL, BIF, JNJ, KBE, DIS, O, XLU, XLY,and BAC. When I see the market stop moving 2% to 5% a day, I will start adding naked puts and covered calls.

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