Shorting the Market – Timing is Everything

 

Date: 11/9/2022
Author: Chris Hood

 

 


Most of you have probably seen the movie, “The Big Short.”

It’s about Scion Capital manager Michael Burry who put up a massive bet that the housing market would collapse.

Ultimately, he was right…and made a tidy 100 million dollars for himself.

If you haven’t seen it, I highly recommend it. It isn’t just entertaining, but there are some important lessons for traders.

Now for the spoiler.

After researching his thesis that subprime mortgage-backed securities were a shaky foundation – one which couldn’t hold, he shorted put his money down.

Way too early.


 

Defy the Bear Market with TRADECOMMAND.

This powerful tool brought in gains like 313% on DRUG in just three hours.

Find out how to trade with us LIVE


A good portion of the movie deals with the backlash of Scion Capital’s investors.

He lost client after client because the market kept rising, and the fund’s value took a nosedive. Burry was sure he was right, but others weren’t so sure.

So what does all this have to do with options?

Stocks don’t suffer from theta (or time decay). When you own shares, they don’t have an expiration date.

If you buy 100 shares of MSFT at yesterday’s closing price of $228.87, those shares may fluctuate in value, but they will not go to zero unless the company goes bankrupt.

Buying a call isn’t the same thing.

Each day you hold the call, it loses some value and will eventually become worthless.

You must match the option’s time frame to the stock’s predicted directional move.

In other words, it isn’t enough to think MSFT will go up; you need to know WHEN it will go up.

If it takes too long, you can be correct and still lose money.

I still have a bearish outlook on the broad market, but I’m not sure how much more it will drop or when that may happen.

One big upswing or extended sideways chop in a falling market could kill the option’s value.

When the drop comes, I might not make anything at all.

Just keep this in mind when you hear predictions about an impending crash or recession. Don’t jump watch a video on macroeconomic analysis, then go buy puts that expire in 30 days.

It’s possible you could win – but possible and probable are not the same thing.

If you aren’t going to play the short-term option strategy that I prefer, then you need to learn how to trade off the weekly or monthly charts.

You can buy options that don’t expire for a year or more (LEAPS), but they will be costly.

Or you could buy the shares to profit from the potential upside and keep your downside risk minimal with a married put.

It might not have gone his way if Burry had used put options rather than Credit Default Swaps (CDS) during the 2008 crash.

It appears that Burry is shorting the market with options now.

I don’t know his exact position, but I’ll bet those options don’t expire for quite some time.

Cheers,
Chris Hood

 

P.S. – I closed six winning trades just yesterday in the Trade Command live trading room. Powerful tools, actionable trades, and live coaching. Everything you need to start making money now is right here.


Share this:

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest
Share on reddit
Reddit
Share on email
Email
Share on print
Print

test

By registering you are agreeing to our privacy policy

Are you ready for The Great American Reset?