After hitting a high of 9,437.71 very recently, the DOW has had two sell-off days, closing yesterday at 9,135.34, closing near the low of the day - not good. So far today the DOW’s low is the open, a good sign.

Is this where the market goes over the falls?

Hopefully not, but no one really knows. I think we all can agree that with 10% unemployment (which does not even include people who have stopped looking for work), the prospects for a bull market are not good. Nil, in fact. If this advance off the March bottom is not a new bull market, it is a bear rally and must fall back to earth. Of course, the market could just be looking for its 50-day average, but that is 8,773 on the DOW. Since March, the market has shown some strength, pulling back to the 20-day average repeatedly, which it did today.

Instead of worrying about whether this is the dropoff, the first thing is to close our short calls, which adds slightly to the trade debit. But only do this if the call value has fallen 50% or more - it must be economically worth the repurchase cost. If the market snaps back in the next week or so, we can sell more calls. Imagine that you write a call for $4 in premium, repurchase it for $1.85 on a stock pullback, then write it again for about $4. Now you have more than $6 in net premium, but the person who didn’t repurchase the calls on the pullback only got the original $4 in premium. That is a BIG difference in return. As I write this on Tuesday morning, it still is possible to advantageously repurchase calls on many stocks.

If it does not snap back, our decks are cleared for selling the stock. I am not a big believer in holding onto the falling stock. And rolling down when the market has pulled back to the 20-day average is just a guess as to what it might do next. With the market poised at the 20-day average, it is on a knife edge. If tomorrow is another down day, I would consider selling s stock falling with the market, looking for a chance to repurchase it lower.

My SuperPut protected covered call (calendar collar) strategy really shines in times like this. If the market doesn’t go off the cliff, we remain protected and continue selling calls profitably. If it does continue down, we can sell the stock and hold the puts, which will gain in value.

This entry was posted on Tuesday, August 18th, 2009 at 10:40 am 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.