NEW YORK (TheStreet) -- I'm not a very well-read person but one book that I couldn't resist reading was The Psychology of The Simpsons.
It was actually a gift given by a psychologist who knew that "The Simpsons" was one of my few passions. That psychologist also introduced my wife and I to one another, so I should have, perhaps, been somewhat wary of new gifts. These days, really all I care about is trading and right now my thoughts are focused on modifying my trading in a covered option strategy, as there is indication of a transition in market sentiment and most importantly, in market volatility.
My least favorite situation is to have uncovered positions. Lately that is an increasing occurrence. Back during the 2008-2009 financial crisis, volatility was high and option premiums were substantially higher while the market was falling. it was actually very easy to stay ahead of the market, if you channeled Homer Simpson: Just say "D'oh."
For my purposes, "D'oh" is an acronym for "Digging out of a hole." The way it is practiced should be the antithesis to the exasperation in which it is usually uttered.In March 2009, it will be the fifth anniversary of market lows that saw a market that went from all-time highs to having lost more than 50% of its value. I don't want to draw parallels between this market, which is barely down 4% in the first month of the year, and the situation in 2008. But I do want to dust off some of the trading strategies that were incredibly useful in outperforming during a terrible market. The first thing to understand is that the primary objective during a down market is to not go down as much as the overall market. It doesn't take too much thought to realize that it's easier to fall from $100 to $80 than it is to rise that same $20 going from $80 to $100. Mountains are much harder to climb than they are to fall off from. By virtue of selling options and collecting premiums you are already at an advantage in a declining or sideways moving market, but the real advantage comes from continually being able to sell those calls even when your positions are far below their cost basis. For those that have now been doing this for a while you have seen how accumulating premiums really can add up, but they have to be given the chance to accumulate. There are differences between now and 2008. The first is that there were only monthly and longer options available back then. Additionally, there were fewer and more widely spaced strike levels. Finally, volatility was already high, while it is just now showing some evidence of growing.