Monday Morning Market Update

Good morning!

Welcome to another Monday Morning Market Update, as we recoup from our first down week in over a month. The 2% move offered a slight rise in volatility, suggesting this is a good time to add a couple more positions. This still isn’t a time to go all in (we will cover how much to invest in a given trade and at a given volatility level later on). I would still stay at about 20-30% invested, using the verticals on the S&P500 that we discussed last week.

There are no major reports coming out this week, but all eyes will be on inflation and retail sales numbers which will be posted throughout next week. Our bullish positions would stand to gain with some good news here. However, why not throw a little downside protection in, in the event of chaos?

Friday Morning, I purchased some FAR out of the money puts (bearish position) on the S&P 500. I used a fraction of my overall portfolio, just about 1%, on these puts, expiring at the end of this year.

Why would we add these? There are a couple reasons:

1. While looking at past performance, a severe outlier event is unlikely. But you cannot predict what is ahead of you by looking at the rearview mirror.

2. The cost is minimal, but the potential payout is exponential. If I lose 1% per year on this, that is the same effect as hiring a money manager. If the unlikely turns out to be correct, I stand to gain significantly.

   1. This is a strategy I learned through reading Fooled By Randomness.

I strongly recommend the book above, which provides the WHY to purchase options that have a small chance of being right (because the payout is substantial).

Pairing this with our core strategy allows us to win consistently with our short put verticals WHILE standing to profit from a large move against us, which is much less likely but far more profitable.

Have a great week everyone, talk to you Thursday!

Ryan

Financial Disclaimer:
This newsletter provides educational content only, not financial advice. Conduct your research and consult with a qualified professional before making any decisions. We are not liable for any losses incurred based on the information provided. Invest with caution and consider your risk tolerance.