The market swooned today and then came roaring back, though it did not erase the entire pullback. Opening at 14,092, the market bottomed today at 13,904 but came back in afternoon trading to close at 13,984.80, making up close to half the drop from Friday’s close. So we finished the day down 109 points and change, which is only a drop of 0.73%. But like a football game that ends as one team is driving to the goal, had the market close been slightly later, the market would have recovered much more of the lost ground, maybe even have gotten flat. Clearly, Mr. Volatility has come to live at our house.

The ostensible reasons for the drop were 1) Citigroup’s earnings report, and 2) $86 oil. Amazing. The market was perhaps expecting glowing news from Citigroup, the largest bank in the country? And did higher oil catch everyone by surprise? Oil companies like Exxon (XOM) and Tesoro Petroleum (TSO) were up today, not surprisingly. And even Citigroup only sold off 1.7% by day’s end.

The correction is I think officially over. But market volatility is not. Everyone is gun-shy, which is why these volatility days occur. Traders rush for the exits to beat bad news sell-offs, which exacerbates the sell-offs. But the market came roaring back, because it’s still a bull market. So the only people hurt are those who panic and sell when the market experiences a volatility down day. These are delightful days for traders buying calls and puts on the market.

Black Gold, Texas Tea
Get ready for $100 oil. Not tomorrow or next week, in all likelihood. But articles have begun appearing in the WSJ and other respected sources, ruminating about how we will handle $100 oil. They have all concluded that we will muddle through. And they’re right; the republic won’t fall. SUV sales have remained strong despite rising oil prices and growing environmental concerns. But that is not my point.

The point is that the powers that be are starting the process of preparing us for $100 oil. Not that I didn’t expect it. Every force we can think of is pushing oil higher - lower Arab production, sharply rising 3rd world consumption; you name it. Russia turns out to have vast reserves, but don’t expect them to flood the world with cheap oil. Like I said, get ready, because it’s coming.

Stock and Covered Call Positions

It is important that stock investors and covered call writers not get panicked by these volatility days. Selling positions at a loss on a simply down day like today hands investors a completely needless loss. In fact, down days like these are perfect for establishing covered call positions: down stock + down market day. When the market snaps back, it gives a nice profit. In fact, this is a perfect time to write out-of-the-money calls.

Covered call writers who want to add some zest to a position would buy the stock on a day when both stock and market are down but only write the call when the market (and the stock) snaps back. This gives a jet boost to the position.

Don’t view market volatility down days like this as irksome problems; see them for what they are: opportunities. But even if that seems too rich for your blood, don’t let Wall Street pick your pocket by taking a loss on these down days.

This entry was posted on Monday, October 15th, 2007 at 3:42 pm and is filed under Covered Calls, Markets/Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.