Stocks Drop...What Now?
Stocks Drop...What Now? Hello Smart Option Sellers! No one likes to see sessions like yesterday. The rout was harsh, especially in the tech stocks, and volatility (see the VIX) exploded. This move puts some of our open positions underwater at the moment. What does that mean? It means that the put option prices are now higher than what we originally sold them for. If you were to close the trades today, you would take a loss on some of them. But we're not going to do that. Although the put option prices may have popped, every single underlying stock is still above the put option strike price. We factor in moves like this by selling strike prices well beneath the stock price. This is why I always stress giving "cushion for error". I believe this move was well needed. And it has now put many stocks and indexes into oversold territory. I wouldn't be surprised if we see a snap-back rally today. The markets had been getting frothy and investors were complacent. That's exactly when moves like this can occur. Think of it as a healthy re-set. I'm licking my chops in a way, because a good sell-off opens up opportunities for us to hop into great new put-sales. I will take the day to see how the markets respond before jumping in, as there could be a bit more residual selling over the next few days. But make no mistake, we are in good shape, and I'm not worried one bit about our positions at this point. I do want to bring up the issue of margin, though. If you are trading these put options in a margin account, you can (and will) see your margin requirements fluctuate up and down, depending on the price of the stock and how much time is left before expiration. If the stock moves closer and closer to the strike price, you will see your margin requirement go up. This is the broker's way of sending a message that they need to make sure you will have sufficient funds to purchase the stock in case of assignment. So just keep an eye on your available funds, as more of it may needed to be put towards your current margin requirement. Stay frosty everyone (be cool). That's all for now. Continue to hold all