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Trade safe and preserve capital

This was an ugly day today. But honestly this is good for the health of this bull market as we were pretty much in a parabolic move and correction is needed. It would be nice and healthy to retreat all the way down to 2700.


Sometimes people ask me why I am selling 16 delta puts (or calls in that matter) and not higher delta and collect more premium.

Well, today’s market price action is a perfect answer to that question. In A bull market with a lot of complacency it may pay off to go closer to the fire and collect more premium but in a normal and volatile market, it can burn you alive.

1% or more drops are nothing unusual (recently see 2015 market behavior). If I was selling delta 30 puts, today I would be toasted already while my 16 delta trades are still OK. They are not anything I would be dancing of happiness about but they are still in good shape.

Just a year ago I myself was chasing premiums too. I was trading options against stocks which offered great premiums and I was pretty much at the money ATM all the time. It wasn’t unusual for me to collect $400 per contract or more. I made tons of money. Until one day, I had to give it all up.

I forgot one thing when trading – safety.

You trade to make money, but it is not the goal. The goal is to preserve capital, save the money and not lose them by reckless trading. Remember Buffett? He says – “Never lose money, and second rule, never forget the first rule.” Why should options trading be any different?

If you remember the first rule and preserve your capital when trading, the money will come. And once they come, preserve them.

Chasing premium is like chasing yield. I once did the same mistake as a dividend investor and bought stocks which were paying great yields. Until one day they cut the dividend and I got nothing and lost money on a stock which dropped. High premiums are not necessarily safe as well as high dividend yield.

Stay safe and preserve capital!!

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