VTS Community,

Markets continue to decline today and the VIX index is pushing an 18 handle.  Now is a good example of something that I often talk about here, which is asymmetric risk.  That basically means that the risk to the upside and to the downside is not the same.

Asymmetric risk is the reason I exit to safety positions, just like we did last week.  It’s not me saying I know for sure what’s going to happen next, of course, nobody does.  The reason I exit and move to safety when my volatility indicators are signaling the market is vulnerable is that being right and being wrong isn’t equal on both sides.

Being wrong.  Let’s say when we exited to safety positions last week, the markets bounced and started to recover the next day.  Well, in that case we’d feel a little foolish, maybe kick ourselves for missing a little upside, and we’d look for an opportunity to get back into trades again.  Not a great outcome, but not the end of the world.  Missing out on a little upside profit is not the same thing as losing money.

Being right.  We exited to safety positions last week, and markets have crashed down a decent amount since then.  So it’s too early to call but so far anyway it was a great exit and well timed.  But what if this is just the start of an eventual 10% correction?  What about 20%?  What if that was the top?  Being right could save the portfolio a huge amount of capital.

Again, being right and being wrong is not equal on both sides.  The risk of forgoing profit or saving capital is asymmetric.  If markets bounce we’ll be looking for a safe time to get back in.  If they don’t and more selling is coming, we’ll be very happy we are sitting comfortably on the sidelines.


Options trading ideas.  Anytime the markets sell-off, two things are happening.  First, by very definition of course, prices are getting cheaper.  Second, volatility is elevated.  There is an options trade we like to take here to capitalize on both of these factors of lower prices and higher options premium.

We’re not taking a new trade today, but I want to give everyone an opportunity to review one of our go-to strategies during market declines.  The Wheel of Fun.  Feel free to ask any questions you have, and prepare your paper trading account if you want to follow along with the next trade.


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