The Philosophical Trader

So I got caught with my pants down (way too large of a short position) and got clobbered by this recent violent upturn in the markets. I should not be surprised, and I should have hedged the upside better. Very disappointing, a bit distraught, and still learning lessons …

However, what an opportunity to take advantage of a bear market that is far from over. I am FIRED UP!! Violent upturns are most dramatic during bear markets, and they do not signal a bottom has been reached. Rather, they are a result of sentiment. Everyone is tired of the gloom and doom (me included), and will jump on any relatively good news, no matter how premature.

And it is premature. Inflation is still very high. All this nonsense from market bulls that we are in a deflationary cycle is just that – nonsense. If the Fed were to stop raising rates now, they would lose all credibility.

I should have hedged with options. Since I missed that boat, I am buying them for the inevitable return to doom and gloom and am grateful that the volatility decreases with upside momentum (this makes the options cheaper). As we return to pessimism, the options premium will rise and provide a double whammy of returns.

Buying: January VIX 35 calls @ 1.40-1.60

Buying: January PSQ calls @ .25 – .30

This guy is funny, check him out: U.S. stocks trade at 8-week highs as Fundstrat’s Tom lee sees another 25% of upside (marketwatch.com). No doubt this bear market rally might run a bit more. That’s just an even better opportunity to get ready for the capitulation. If SQQQ gets down to 40 I will be buying more. In the meantime, downside risk is less with options.