As stated, my plan is to step in with a bit more cash when the Dow hits ~7500.  So far, I haven't seen it there long enough to open / add to positions.  In the meantime, like most longs, I'm bleeding.  My short GE puts are in the money as is my short XLFs.  These are two vehicles that I'm going to be all right with owning. GE's continued drop is a bit eye popping.  But what's even worse is my C.  I was assigned at 22.50 and had been writing calls for a few months.  I believe my total cost basis is somewhere around 21.00.  The fact that it's trading around 7 bucks today is something that seemed highly unlikely, but it's happened.  It is the worst holding in my portfolio.  C @ 22.50 felt like a steal much like GE feels like a steal at $17.  Goes to show you that a low price can still go lower.

So I'm really in a holding pattern at this point.  The market is still volatile, and with my puts in the red, I can't close them and write more.  Nothing gets triggered until we go below 7500.

I waited years to deploy cash into the market.  Since 2006 I've been sitting tight.  It took years for me to get in ... I also suspect it's going to take years for me to really see this pay off.  Makes one consider CDs, eh? :) 

There's no doubt that if you've been trading options any length of time and you continue to bone up on the ins and outs of options that you've come across the analogy of the insurance company.  The idea or argument proposed by those who favor selling options is that the people who make money are those selling premium, not buying it.  Just look at insurance companies ... they're massive institutions that make money hand over fist in the form of premiums.  They spread that risk so that they have virtually no way of getting called all at once.  Now apply that to your option trading skills.  Diversify your option selling across multiple products, multiple strikes, etc and you'll turn out a winner.  Makes perfect sense, right?

Enter reality.  Let's look at the world's biggest insurer in AIG.  They apparently need more money and it has not been determined what their concreet exposure is. (see Bailout Fund Needs Money).  The bottom line is that you're trading risk for premium, just like an insurance company.  AIG and others have apparently overlooked that.  There really isn't a way to perfectly hedge exposure and the more positions you have on, the more impossible it becomes.  The best way to keep your risk manageable is to consider assignment for every option.  Never mind the fancy margin calculators.  Can you cover it?  Can you accept the loss?  Can your spouse accept the loss?

As you know, I sell options.  I also enter spreads to build in a hedge (at the expense of profit).  These tools are extremely useful and flexible.  However, they also give you enough rope to shoot yourself in the foot.  It can happen to the big boys and it can happen to you. 

I sold some NOV 17.50's in October for ~0.60.  I bought them back for 0.23 after GE's big move up today.  Truth be told, I'm playing for a pull back.  I'm looking to sell either DEC 17.50's or 15's on the pullback, if I'm so lucky to get one.  I have my eye on 0.80 for the 17.50's.  it's a big credit because GE is still very volatile.  Plus it's closer to the money than I typically like to play, but I don't mind owning some GE.

In other news, the short XLF puts and calls that I have were both sitting around 0.09.  If they hit a nickel, I'll buy them back.  I may also consider selling the XLF stock I own for a profit and starting over with short puts again. 

Wow, XLF at 16.01 and GE at 20.04. This one is going to come down to the wire. At this point, only Mr. Market (not the huge guy) is going to know how this will end up. I have decided that I'm leaning more towards having them expire worthless because I want to sell more juiced up premium. :)

--- UPDATE 4:02 ---

Double assignment. 

I was certain that the VIX went over 50 during the drops in 2002 when the long term bottom (then) was forming.  If I go back through historical data, it isn't so.  So I'm putting this up for my own purposes.

The second thing on my mind today is market moves.  Sure, that's something I think about every day, but it can have a profound impact on my holdings.  The short puts that are in play are XLF (16 strike) and GE (20 strike).  Both, given the current volatility, are really a market day away from being back out of the money or deeply in the money.  As I mentioned, I'm actually torn on the GE assignment.  I like the idea of premium in my pocket but I also really like the idea of owning GE at 20 (or 19.40 after premium is factored in).  I think that's a long term slam dunk.  Can GE go to 0?  Sure, but I like the prospects.  The other item is XLF which I'm also torn over.  The financials have admittedly been worse than I anticipated.  I still think I can continue to write premium against C for awhile and continue to lower my cost basis, but truth be told, the market for financials seems like an abyss.  Obviously, that makes one nervous, but it also feels like a great time to buy (when fear is high).

Today is pivotal.

For those who ignore vega, and many do, here's a little glimpse of how this little variable can really have a dramatic effect on your position.

My short puts on GE and XLF are still in play.  The GE puts were in the money on Thursday and for most of the day on Friday.  Then GE surged up 13% putting it around $21.  I'm really mixed here.  I wouldn't mind owning GE at less than $20, but I also like having the capital freed up as there are plenty of bargains on my shopping list.  The second option isn't so lucky.  My XLF $16 puts are in the money.  It was looking very bleak on Friday, but then the XLF surged 10% to close at $15.10.  It really all comes down to when the recovery is going to happen.  I've got my money on a large move to the upside that will happen at some point in the near future.  Whether it's next week or not, I have no idea.

I think it's safe to say that my short call on C is going to expire worthless.  I'm slowly dropping my cost basis on that stinker and still like it as a long term hold.  I'd like to write calls at no less than 22.50 and preferably higher.  We'll see what the market offers me next week. 

We're now seeing the markets crumble.  I anticipate a snap back at some point in the short term.  This is also known as the dead cat bounce.  It's way overdue and it's likely to be significant.  Significant is a word that has different meanings based on volatility, but I anticipate that the Dow will reclaim 10,000 in the next month or so.  Whether or not it will hold it is another matter.  And of course, there is always the high likelihood that I'm wrong and we sink even further.  So how can one play such a short term powerful boost but not risk a lot of capital?  I submit the idea of an out-of-the-money long vertical spread.  This isn't my favorite play in most circumstance because markets take time to move and OTM spreads have wicked theta.  Of course, there's always a trade off, in return for having each day cost you, the OTM spreads are cheap.  So if you're anticipating a big move fast, go out of the money to get more bang for your buck.  But be warned, if the underlying doesn't move in your favor very quickly, you're a loser.  That's right, even if the underlying moves nicely in your favor, theta will eat away your profit.  The second problem to overcome is the current extreme readings on the VIX, which is represented as vega (option volatility).  When the "relief" rally kicks in, vega will fall very quickly.  A long option is long vega.  The decrease in vega combined with theta will kill your option's value even though once again, we get a favorable move that happens quickly.  This is where the vertical spread comes in.

The VIX is unusually high due to all of the fear in the market.  This should make you consider option plays that capitalize on this occurrence.  There are a few plays that certainly make this possible, but not without some consequences (of course).

The first and easiest to understand is short options.  Selling a high volatility option nets you significantly more premium when the VIX is this high.  The consequence is easy to see, you're being paid more because you're taking on significantly more risk.  A stock like GE moving 6, 8, 10% in a day make it look like yesterday's tech stock. Companies blowing up left and right or requiring bail outs make your perceived risk much higher than in a 10-15'ish VIX environment.  I find there are still some times when I feel the risk is worth it.  A good example is on an index.  Yes, the indexes seem to thrash about wildly these days, but indexes don't go out of business. In a short put situation, assignment means you're buying even lower and can write bloated calls against your new holding.  Of course, do not sell puts in any situation where you're not comfortable owning the underlying.

Butterflies are also short vega option plays.  As volatility falls, the butterfly shows a profit.  The catch here is that a butterfly has a relatively small profit zone.  The profit is big (sometimes 10 to 1 risk/reward), but the distance between profit and total loss can be as small as a few percentage points in the underlying.  The good news is, the risk is usually tiny.  You can put on some butterflies for a dime or 0.15.  This might make you feel better if you're not thoroughly convinced that the market is settling down.  In a wild market, as we've seen, a stock can move a few percentage points in a matter of hours or minutes and in no time you're showing a full loss.  The other drawback is that this is a 4 option play, so commissions can be double a "normal" spread and quadruple that of selling options.

A short calendar spread is very short vega.  It makes sense considering a long calendar spread is very long vega.  A rise in volatility on a calendar spread increases profit, so obviously the inverse is true making a short calendar a candidate if you're expecting volatility to drop substantially.  The draw back to this play is that theta is brutal.  Your profit zones to the right and left of the strike are also relatively small.

Since selling options takes you short vega, selling a straddle is a great way to have lots of vol crush power on your side.  And only one of the options can be assigned, so you have a slight built in hedge in case things go very badly.

Disclaimer: I do not recommend any of these position types, this is strictly pointing out some option position types that may be relevant given the current market conditions.  Always trade on paper until you understand how these positions respond in a real market environment.

Definition: the practice of extorting money or other property, especially by a public official, by the use of threats

Sound a little bit like what's happening to us through this bail out plan?  The threat is financial armageddon.  The threat is that without it, your retirement goes bye-bye.  Such a shame.

Back to the market, I'm investigating some additional "free butterfly" items.  I've been looking for items that are in a relative range with high volatility.  My best candidate right now is gold.  GLD is in a bit of a range, and at the present, seems to be in the middle of a range.  I'm going to add this to my watch list as when extremes are hit on the range, I'll open a vertical spread.  Why a vertical?  Because I don't really want to own gold.  My long stomach is feeling a bit full at the moment.

Any other ideas for issues to try flys with, please add a comment. 

Two of my option plays have really surprised me.  First, the $22.50 short calls on C are now in the money.  If these are assigned, that's fine, I made money on premium.  It isn't exactly how I wanted it to play out, but it's not a bad situation at all given financials.  I may even be in the black on financials this year thanks to option income.  The second is my short $20 puts on GE.  I shorted these puts during the first big down turn a couple of weeks back.  Since then, GE went back up to over $26 making the juicy premium collected on GE seem like easy money.  Of course, nothing is easy or goes as expected as GE looks like it may be flirting with $20 per share if things keep going the way they are.  Admittedly, I'm scrambling for a plan.  I don't mind getting assigned at $20 because I think it's a wonderful price for a well diversified and massive company.  But the question becomes, do I want any more?  If GE dips below $20, is it a good time to sell some 17.50's or 15's?  Or do I just write calls like I did with C?

I normally already have my mind made up for these situations, but again, this seemed like easy pickings for premium just a couple of weeks ago.  It's probable that this will still turn out to my advantage (i.e. puts expire worthless), but it's always important to have a plan long before the unexpected happens.

Many of the option forums I frequent have many a topics of "I have position X and it's way in the red, how do I adjust?".  Shame on you.

Short sellers have every reason to feel that the market deck is stacked against them.  When company stock shares go through the roof for no apparent reason (.com companies with no value, solar energy stock quardupling over a year with no products to market, etc), no one stops that.  It's "normal market forces" speculating on future value (cough).  Where is the government handouts to the shorts that are losing when the market gets out of whack to the upside?

So when companies finally have their hat handed to them and longs are screaming uncle, the government comes in and bails everyone out.  All they get is a firm wag of the finger and short sellers are shafted.

Again, I don't short sell for a number of reasons, and this is a good one unfolding right before us.  I don't usually make any recommendations on this blog, but I will here ... do not short sell stocks for the long term.  If you must do some short term speculation to the downside or hedge an existing bet, please consider doing so with options.  Short selling is no way to make money long term.

There's no doubt at some point we'll hear someone talk about how the word for danger and opportunity are the same in Chinese.  I don't even know if that's true or not, but we are getting a long term discount.  Think about if you bought stock when the Dow was at 14K.  You'd be off a good bit by now.  I'm not saying wait to buy stock until things look really ugly because you'd most likely be missing out on some of the bigger runs.  But when the opportunity presents itself, there's no reason not to take advantage of it.  Is now the time to buy?  I don't know, that's up to you.  Maybe you're the type of person that likes to see an uptick or two, the clouds parting a bit before jumping in.  That's probably pretty sound.  For me, I never know the difference between an uptick and a head fake, so I like to buy on the way down and sell on the way up.

I'll share some positions I took yesterday for discussion when the smoke clears.  But let's just say that the plunge in GE over the last two sessions was too much to resist :)