People love the idea of entering options trades with a high probability of success. It’s easy to be seduced by the prospect of winning on 60, 70, or even 80 percent of our trades.
It doesn’t take much imagination to enjoy visions of swimming in all the cash we’d surely be earning with such a strategy. And why not? With that kind of win rate, we’ll often go on runs where we win on multiple trades in a row.
Talk about a confidence builder!
Of course, there is no free lunch on Wall Street. And in strategies with a high probability of success, there is a dark underside that people conveniently like to ignore.
This type of discussion quickly makes us unpopular at cocktail parties. So we avoid it. Many know, but most are unwilling to talk about it.
The trading action in the regional banking sector, and to a lesser extent bond ETFs, drove home a stark reminder to anyone involved in naked options (like me) — that there will be times when we will suffer large losses.
They say to buy when there's blood in the streets.
Does this count?
Hardly.
Many indexes around the world are just a few basis points from new highs. Most stocks in America have been rallying for 9 months.
But sure, there's a little blood, with some of these small regional banks disappearing. But depositors are keeping their money, so the only cost is a few people lost their jobs.
The regional banking panic that began last week has caused a drastic repricing of financial stocks.
As selling pressure accelerates for a variety of vulnerable banks, executives are coming out and buying shares in an effort to shore up the volatility and put a vote of confidence in their stock.
