We’ve been waiting for the market to take a downturn for a long time now. We have been saving our option premiums and the ESPP profits for this moment. Now we can begin to slowly take some new positions into the ESPP and not sell for a while. The market will return as it always does. Most of the time, the market goes up, and about ⅓ of the time, it goes down. This is the time we invest a little more money. The way we do this is to dollar cost average. I am able to use both paycheck withholdings and 1 lump-sum per month into my ESPP. If my plan is to invest a total of $3,000 without paycheck withholdings, then the way I am going to do this is by putting an order in by voicemail after the market closes in 3 groups of $1,000. I don’t know what the price will be next month, but I am NOT going to throw all of my eggs in one basket (the basket representing time) and cross my fingers.
I am almost ready to buy back my call that has increased in value by 60%, so it has hedged my position nicely. It never hedges my whole position, for example, my $400 premium can hedge a hypothetical 100 shares at $4 each. And since my premium was from a contract of 100 shares, it makes that example more real. Or, since the market has taken almost $8 per share from where we started, I can take comfort in that $0.50 of each dollar was hedged. Sure I am just making myself feel better by justifying it, but it’s true that I saved money by having that open contract while the stock went down. I hope this helps clarify everything in easy to understand examples. If I buy back my contract to lock in my gains, I will not sign another contract because I don’t like how low the stock is; I do not want to obligate myself to sell at a price that isn’t substantially higher than the stock price is now.
So am I saying that I know for sure the market is going back up in the near future? Am I saying that I should buy a call option to create a bullish position to benefit from that increase? No, and no. I am in the middle of those two choices. If you were going to bet money on the stock going up, that is taking a risk that 1: costs extra money, and 2: is a disadvantaged position against Theta (time decay is working against you). I will save my money from the risky and time-dependant/expiring bets, and buy shares while the stock is relatively low.
In conclusion; dollar cost average, and it’s time to buy, not sell.
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