Dr. Kearney’s Option Clinic Random Thoughts

Good morning traders and investors and welcome to the Options Clinic.

In room one we have random thoughts, room two a trading story and then we’ll sit down in my office and discuss what you learned today.

As of one-half hour ago, the S&P 500 was unchanged for the month of March. A Month including a 9.0 earthquake, a tsunami and nuke problems in Japan, fighting in Libya, two of the "PIIGS" having problems ( Ireland stress test results this morning show need for $24B Euros – $34.1B – more capital, not a big surprise), no US budget agreement eight months into this year’s budget, Oil at $106, etc.

40 degrees, welcome to baseball opening day. be ready for the snow tomorrow for those in the northeast

Room two. March 30, 1981, 30 years ago, I was a young pup of a trader on the CBOE floor. Keep positions small, watch the risk, learn how to trade and make a little money. Simple enough. The DJIA was up around six points in the early afternoon…. then WHAM!! Down about three points before a TRADING HALT. President Reagan had been shot. I had legged into a spread and was trapped long! Not a big position in hindsight, but at the time I was shocked!

As you know the President was hurt much worse than they thought, but came through fine, and from the hospital bed said "honey I forgot to duck", and in reference to a cancelled appointment that evening in Philly said "I’d rather be in Philadelphia", a W.C. Fields line. The Academy Awards were cancelled that evening, but the NCAA played the Championship game, with Indiana beating North Carolina, 63-50(?). No word if President Reagan had all the #1 seeds in his final 4. (By the way, 33 participants in the family NCAA pool this year, no $$, just fun, the pool is officially over. Six people picked a team into the final 4, no one has a team winning on Saturday). Anyway the following day the markets opened, the DJIA "surged" higher by 11.71 points, closing over 1,000 again! Volume jumped to 50.9 million shares! 

Let’s go into my office and discuss….

I talk to investors who have their risk under control, or think they do. They use "stops" (stocks occasionally gap lower, don’t they), or plan to close a risky trade in the next hour or so…. provided something like an unusual world event, or a corporate announcement (Berkshire off ~2% on #2 surprise resignation), or ??? don’t occur. I was standing next to three brokers holding orders I needed to close my position. When the announcement "All trading on all stocks and all options on The CBOE is halted immediately", that was it, I had a position I didn’t want. I made money on the trade the next day. I WAS LUCKY. Trading skills had nothing to do with it.

The point of this story: I think that investors should "expect the unexpected". "There’s no way XYZ will drop to $ XX.xx". It can get there, I’ve seen it. For example, if you sold a call option at $1.00 and it’s now two weeks until expiration and the call is selling at $0.05, think about buying it back.

Take a look at the positions you have on, and ask yourself "What’s the worst case scenario" for each of them? 

and Go Cubs! Mentioning the Cubs after "worst case scenario" is purely coincidental.

The market seems to be in good shape for the moment, I don’t think I need to prescribe anything today. But I think you should come back to the office next week for another consultation.

Dr. Kearney’s Option Clinic is now Closed !