6/3/2007 10:27:58 AM
Here's an update from Angelo Campione, editor of Advantage Credit Spreads. If after reading, you would like to try Angelo's service - you can subscribe by clicking here.
This weekend I want to discuss a question I received from a reader during the week.
The question centered on adding to our position to get a greater premium now that the market has risen.
It's a natural tendency to want to invest more money when we feel a level of safety in a certain position and the positions we take are always safe at the time we put the signal out. However, unforeseen events can and sometimes do happen and for this reason every trader should have a plan. It doesn't need to be an elaborate plan, something like: "I will put no more than 10% of my investment capital in any one type of investment and I will follow the advice with discipline of the ABC & XYZ online trading/investing service" and write it down where you can see it so that you stick to it.
At the end of the day, it's important to understand that for each credit spread you do, you put $1,000 "at risk" until the contract either expires or is closed by buying it back, that's the amount you can lose in a worst-case scenario. Even though the chances of realizing the worst case are very small, the chances of losing say between 10%-50% are not as small.
Your plan is where you give yourself the emotional leeway to simply let the market do whatever it does. You understand there is risk but you are not behaving in a risky manner. It reminds me of something I heard Warren Buffett say when he gets into his positions. He doesn't care if the markets were to close for 5 years, he's clear on why he got into his positions and has a plan for them. He understands there is risk but is he is not risky. Now if you don't have the emotional fortitude of Warren Buffett, I suggest you spend a little time looking at what your investment capital is and how much you are willing commit to a conservative strategy that will have you accept risk but not feel risky.
Once you know this, you can act on the suggested trades with a level of detachment so that if the worst-case scenario were ever to be realised, it would not wipe you out. Our intention is for you to make regular positive cashflow and as we can't guarantee what the future results will be, it's up to you to be responsible for your investing decisions.
While the market is clearly still in a strong uptrend, our position remains firm in SELL/HOLD mode.
The SPX made yet another new local high and has closed at a new high of 1536.34. It still has a little more to go to break its all time intra-day high of around 1552 and that could happen this week at the rate it's going but resistance remains strong.
SPX Chart - 12 months
SPX Chart - 6 months
As the 6-month chart shows, the market closed above the upper trend line, this is a strong move, however it's still within our tolerances, and we do still have several technical indicators on our side (discussed in the previous post).