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Doug: Options and other short-term trading vehicles' current prices are determined by demand or lack of demand, and demand is determined by expectation of the future. When the market is making little progress up or down, traders are unwilling to bid prices up because their expectations are low. The prices on both puts and calls will slowly adjust lower, creating options that are below fair value. Once a move begins, the options that reflect the direction of the move will rapidly move to an overpriced condition, and the options that are in the other direction will move further into undervalued range. If you try to buy when the market is in a fast trading condition, the demand is high to own and low to sell and you'll pay a premium to own the option. Let's say that you bought a put on the close and the market is moving sharply to the downside. You are buying in anticipation of even lower prices. The seller is feeling the same emotion and is only willing to sell if you pay a premium that reflects his expectation. If, the next morning, the market opens down, but not to the degree that the trader expected, the puts will actually lose value and the calls may increase. We at Crash Proof Advisors are aware of this phenomenon and time not only the market but also the trade. |
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Neal: You know so many folks. Tell me about their huge gains; tell me about one of your losing days. |
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Doug: The year was 1982 and I had caught a fantastic down move. I was sitting on a $45,000 profit and looking for more. The market started to turn up, but being the gifted technician that I thought I was, I felt that this was a minor blip and that the bear market would continue. Day after day, the market continued to rise, and my profits began to erode. Logic told me that the market had to turn down soon. The market continued to rise for 17 days in a row. The period that followed was the greatest bull market in history. |
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Neal: So you turned a $45,000 winner into a $5000 loser. |
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