This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Making D'oh on a 'Homer Simpson Strategy'

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.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,001.22 -38.27 -0.22%
S&P 500 1,988.40 -3.97 -0.20%
NASDAQ 4,538.5510 +6.4470 0.14%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs