Options Trade #2 - CVS Short Put

Updated: Dec 6, 2018

The first part of today's blog will be another "Wheel of Fun" put trade, again on the CVS. Click here to watch the Wheel of Fun strategy video. The price has moved lower so we can deploy a little more capital to this position now. Here are the trade details:

-  Currently in one position     (Since Mar. 8, 2018)


SELL to OPEN 1 x April 2018 61.00 PUT Credit:  1.50$

* Also maintain original trade #1 CVS position

Notes:  Trade #1 is the 67.50 put strike Trade #2 is the 61.00 put strike

Daily blog:

On October 11th, 2017 I wrote an article called the VIX index and VXST, VIX3M, VXMT.  You can review that when you get a chance because these indexes are very valuable tools in our tool belt of market indicators.

Since February 5th and even a week or so before that the markets have been looking a little sick and are having a very hard time choosing a direction.  This is a distinct break from the fairly uninterrupted march higher from the year before.  Remember volatility was rising even before stocks turned down and VXST, VIX, VIX3M, VXMT among several other indicators tipped the markets hand and we exited early.

In my mind the "holy grail" of investing so to speak is a portfolio that can perform better than the broad markets during good times, but also attempts to move towards safety positions when things are weak.  It's impossible to avoid all the drawdowns but the goal is to mitigate as much as possible.

There's always investors who are permanently bearish on the markets and the economy, and when things go off the rails they will be all over the internet and news outlets telling everybody they were right.  The problem is the average recession cycle in the United States is roughly 6-7 years so these "perma bears" spend most of their time bleeding capital.  Seven bad years and then one good year doesn't make for a very attractive long-term rate of return.  

As I said the real trick is to make a good rate of return for the seven good years and then not give it all back during the one bad year.  We have to keep trading.  Who knows if the next recession is coming next month or five years from now?  So it's really about finding that balance.  

Among the many market indicators that assist us in that endeavor are these volatility indexes:  VXST, VIX, VIX3M, VXMT.  They can be a good indication of when things are safer or potentially risky.

Remember the normal state of things is for the shorter term indexes to be below the longer term indexes.  Investors need to be compensated for unknown future risk so the further out the index tracks the higher the values should typically be.  When this is not the case it may be an indication there is some potential trouble brewing, or at the very least not worth the risk.

Normal:  VXST < VIX < VIX3M < VXMT

Yesterday:  VXST > VIX > VIX3M > VXMT  -  All inverted

* VIX3M used to be called VXV and in some softwares, still is.

Now this certainly doesn't mean markets are going to crash now.  In fact sometimes when we reach this inversion situation they can storm back higher with vengeance.  Market bounces can be strong and it's certainly possible stocks are setting up for a big recovery here and off to new highs.

However, successful long-term investing isn't about rolling the dice on things like that.  It's about being in safety positions every time there is danger, because once every few years the danger signs materialize into something worse.

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