I asked the question should you be selling options in a bear market back in May. Now that we are close to new lows in the market and a deep recession might be around the corner, I wanted to revisit this video.
Before we answer the question about selling options during a bear market let us take a few minutes to discuss where our economy and markets are currently. First, the FED is looking to increase the funds’ rate next week by three-quarters of a point. They might go higher but my guess is they will not do a full percentage point increase. Also, it looks like they will raise rates two more times after that putting us in a 4% to 5% range. This will continue to be a headwind on the market.
Next, massive numbers of people are retiring monthly. We have been warned for years about how the boomers will be retiring and causing hardships for our economy and the market in general. It has been reported that over ten thousand baby boomers are retiring each day. To make matters worse this will continue through 2030. As they retire, they spend less and do not aggressively invest. Instead, they keep their money for retirement.
A lot of people do not realize that this is not just the case with the US. This is happening all over the world. The US does have a large millennial generation that will buffer this for us. However, most of the rest of the world does not have a large young group like the millennials.
China is one of these countries that does not have enough young workers. They have a huge population but most of its growth is due to people living longer. It is not from more babies or children. This will impact their ability to be the manufacturing hub of the world. A sizable number of companies are closing plants in China and either onshoring or opening plants in other countries.
We have seen the move away from China with most of the chip makers as well as Apple and other bigger producers. The impact of this is some huge, short-term investments to build new plants and supply chains. This will be a headwind for companies like INTEL, AMD, and Nvidia.
All of this points to some major challenges for the near future. I also believe recessions will look different than they have recently. Because of so many retirements, unemployment will stay low. Also, a lot of the recent inflation is due to increased energy and supply chain issues. So, the rate increases will not necessarily solve the issue.
One other point about the increasing rates is the fact that we cannot afford high rates due to our huge national debt. A 200-basis point increase (2%) would increase interest payments by $375 billion yearly. (https://www.crfb.org/blogs/how-would-higher-interest-rates-affect-interest-payments) The fed with all the increases is looking at a total 400 basis point increase or nearly $750 billion a year. At some point, they are going to have to start decreasing them.
Now with all I just shared, you might be thinking that I am not pro-options selling. I still think selling options is a wonderful way to earn extra income and minimize your losses. I do think it should be part of most if not all investors’ investing strategies. However, I do think it is important to minimize risk by lowering Delta (Learn more about the Greeks.) and purchasing downside protection.
For me, that means using a fifteen Delta for puts and a twenty Delta for calls. I might even go lower if necessary. I will also look at purchasing more puts to protect against huge drops. Meaning I am going to take less profit for more protection. Also, I am going to continue to sell call options during these trying times. I have found selling Covered Calls is a great buffer for my accounts.
Thanks for taking the time to read my post. Please add a comment and let me know how you are dealing with these crazy times.
Uncle Jim
