01/11/2021–1 or 2?

Knowing when to take more risk or when to scale it back constitutes the essential trading question that never offers a clear answer in the moment. Of course there exist obvious situations where the answer screams out at you. Is your online brokerage calling to inform you of a margin call? Scale it back. Have you not made a trade in over a week? Dip your toes in or find another way to procure income. Have you already sold one put with some meat on it and are wondering if a second sale makes sense in the face of a pandemic and political upheaval…hmm.

It’s harder to find answers to grey-area risk situations. On one hand you can examine the past and hope that it can provide a bit of insight, but as we’ve all heard ad nauseum, “past performance is no guarantee of future results.” Reaching out to others can go a long way in refining one’s thoughts, but ultimately the conundrum remains the same and a choice must be made. Not choosing, that’s still a choice.

I answered today’s question of whether or not to sell another put by deciding against it. For now, the time value of the option coupled with the underlying sense of societal unease led me to believe two things: perhaps a sale at this price will end badly, or more likely, I might have another opportunity to sell the same option at the same price with less time remaining to expiration.

To the first consideration, most options expire worthless, and I this one will too. The Capitol riots merely caused an afternoon of unease in the market, and the steadily climbing death toll from the pandemic has failed to roil the finance world for months. A few more riots seem unlikely to send the S&P’s hurtling down 300 or 400 points. The strike price feels safe.

The second thought stands a much better chance at coming to fruition. Even an option with only few days of life remaining has enough vega (price sensitivity to volatility) to easily double or triple in price with just a move of a few points in volatility. How many times have I sold an option only to see it jump in price minutes later? Not that the scenario poses a huge threat to my position, but I already sold one of them. Why not wait a day or two to sell another? If done skillfully, I might manage to collect the same price, and if not, at least I will have the risk of that option in my position for a few less days.

If the reason for taking more risk comes down to a fear that you will miss the opportunity, you’re probably best laying off. There’s always an abundance of risk to be had in the market, and tomorrow will present another, perhaps better opportunity. Rushing into trades to capture short term credits at the expense of adding needless risk to ones sheets (position) usually slips by the market’s hand unpunished, but it’s no way to conduct business over the long term.